Stabilization and the Aftermarket Prices of Initial Public Offerings

33 Pages Posted: 19 Aug 2012

See all articles by Khelifa Mazouz

Khelifa Mazouz

University of Bradford - School of Management

Sam Agyei-Ampomah

Cranfield University - School of Management

Brahim Saadouni

Alliance Manchester Business School, The University of Manchester

Shuxing Yin

University of Sheffield - School of Management

Date Written: July 31, 2012

Abstract

The paper examines the determinants of stabilization and its impact on the aftermarket prices. We use a unique dataset to relax several assumptions in the stabilization literature. We find that underwriters support IPO prices shortly after listing, particularly in cold markets and when demand is weak. We also show that stabilized IPOs are more common amongst reputable underwriters. This finding suggests that stabilization may be used as a mechanism to protect the underwriter’s reputation. It also implies that reputable underwriters may possess private information and price IPOs closer to their true values (i.e. higher than those indicated by the weak premarket demand). Consistent with the latter view, we show that stabilized IPOs are offered at higher prices and suffer less underpricing than those indicated by the premarket demand, firm characteristics and market-wide conditions. The post-IPO performance results indicate that stabilized IPOs are unlikely to be mispriced as their prices do not exhibit any significant reversal after the initial stabilization period. We conclude that stabilization may be superior to underpricing as it protects investors from purchasing overpriced IPOs, benefits issuers by reducing the total money “left on the table” and enhances the overall profitability of underwriters.

Keywords: Stabilization, Underpricing, Underwriter’s reputation, Hong Kong IPOs

JEL Classification: G3

Suggested Citation

Mazouz, Khelifa and Agyei-Ampomah, Sam and Saadouni, Brahim and Yin, Shuxing, Stabilization and the Aftermarket Prices of Initial Public Offerings (July 31, 2012). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2132037

Khelifa Mazouz

University of Bradford - School of Management ( email )

Emm Lane
Bradford, West Yorkshire Bd9 4JL
United Kingdom

Sam Agyei-Ampomah (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom
+441234754375 (Phone)

HOME PAGE: http://www.som.cranfield.ac.uk/som/p19638/People/Faculty/Academic-Faculty-Listing-A-Z/Dr-Sam-Agyei-A

Brahim Saadouni

Alliance Manchester Business School, The University of Manchester ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

Shuxing Yin

University of Sheffield - School of Management ( email )

9 Mappin Street
Sheffield, S1 4DT
United Kingdom

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