The Effect of the Trading System on IPO Underpricing: Evidence from the 1997 Order-Handling Rules

34 Pages Posted: 16 Jul 2009

See all articles by James A. Ligon

James A. Ligon

University of Alabama

Hao-Chen Liu

affiliation not provided to SSRN

Date Written: November 20, 2008

Abstract

This study uses a natural experiment resulting from the 1997 Securities and Exchange Commission rule mandating a change in the order handling rules (OHR) for all NASDAQ stocks to test whether secondary market structure affects IPO underpricing. We find that the increase in liquidity that the OHR represent led to a decrease in underpricing for cold IPOs suggesting that the expected cost of underwriter price support is a factor in the level of IPO underpricing for cold IPOs, at least on markets where the lead underwriter and principal secondary market maker are usually the same entity.

Keywords: IPO underpricing, market microstructure, order handling rules

JEL Classification: G10, G18, G24

Suggested Citation

Ligon, James A. and Liu, Hao-Chen, The Effect of the Trading System on IPO Underpricing: Evidence from the 1997 Order-Handling Rules (November 20, 2008). Available at SSRN: https://ssrn.com/abstract=1433465 or http://dx.doi.org/10.2139/ssrn.1433465

James A. Ligon (Contact Author)

University of Alabama ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-6313 (Phone)
205-348-0590 (Fax)

Hao-Chen Liu

affiliation not provided to SSRN

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