An Examination of Large Sell Orders in Cold IPO Aftermarkets

Posted: 23 Jun 2003

See all articles by C. N. V. Krishnan

C. N. V. Krishnan

Case Western Reserve University - Department of Banking & Finance

Ajai K. Singh

Department of Finance, University of Central Florida

Allan A. Zebedee

Clarkson University

Date Written: April 2004

Abstract

Investment bankers routinely take large naked short positions in low demand or cold IPOs, and flipping accounts for a relatively large proportion of trading volume in cold IPOs. We hypothesize that lead underwriters cover their short positions through selective buy-back of shares from institutions at the offer price during the stabilization period. The empirical implication is that the information content of these anticipated bulk trades will be small relative to other trades. Our results support this hypothesis and we offer the following explanation. Lead underwriters provide institutions with an escape mechanism if they do not wish to retain their initial share allocations because they are valuable buy-side clients involved in a repeated game. Such an escape mechanism entails the investment banker anticipating that some bulk flipped trades will occur that s/he will use to cover the short position in cold IPOs. Thus, there is no 'surprise' or information content in such bulk flipped trades. The idea that lead underwriters provide selective price support to institutions in the stabilization period is consistent with accounts in the popular press which indicate that restrictions on flipping are not uniformly applied and retail clients are specifically under duress not to flip their allocations.

JEL Classification: G24, G12

Suggested Citation

Krishnan, C. N. V. and Singh, Ajai K. and Zebedee, Allan A., An Examination of Large Sell Orders in Cold IPO Aftermarkets (April 2004). EFMA 2003 Helsinki Meetings. Available at SSRN: https://ssrn.com/abstract=407848 or http://dx.doi.org/10.2139/ssrn.407848

C. N. V. Krishnan (Contact Author)

Case Western Reserve University - Department of Banking & Finance ( email )

10900 Euclid Ave.
PBL 363
Cleveland, OH 44106-7235
United States
216-368-2116 (Phone)

HOME PAGE: http://weatherhead.case.edu/faculty/c-n-v-krishnan

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

Allan A. Zebedee

Clarkson University ( email )

Potsdam, NY 13699-5780
United States
315.268.3890 (Phone)

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