Underpricing versus Gross Spread: New Evidences on the Effect of Sold Shares at the Time of IPOs

20 Pages Posted: 12 May 2004  

Salim Chahine

American University of Beirut - Olayan School of Business

Abstract

This paper verifies the relationship between the direct and indirect costs according to the number of primary and secondary sold shares. While the gross spread increases in the dilution factor, it is endogenously related to the participation ratio. Although not significantly related to the gross spread, the participation ratio increase in less risky IPOs following a period of positive market conditions. Consistent with Habib and Ljungqvist (2001), the higher the gross spread paid at the time of the IPO, the lower the first-day return. However, less risky firms with a higher participation ratio hire the services of more prestigious underwriters who charge a lower direct cost, but a higher indirect cost, in order to compensate investors.

Keywords: Gross spread, underpricing, initial public offerings

Suggested Citation

Chahine, Salim, Underpricing versus Gross Spread: New Evidences on the Effect of Sold Shares at the Time of IPOs. EFMA 2004 Basel Meetings Paper. Available at SSRN: https://ssrn.com/abstract=498482 or http://dx.doi.org/10.2139/ssrn.498482

Salim Chahine (Contact Author)

American University of Beirut - Olayan School of Business ( email )

Bliss Street
Beirut 1107 2020
Lebanon
961-1-374-374 (Phone)

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