Stabilization, Syndication, and Pricing of Ipos

Posted: 15 Aug 1994

See all articles by Bhagwan Chowdhry

Bhagwan Chowdhry

UCLA Anderson; Indian School of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1994

Abstract

We argue that in the after-market trading of an IPO, the underwriting syndicate, by standing ready to buy back shares at the offer price (price stabilization), compensates uninformed investors ex post for the adverse selection cost they face in bidding for IPOs. This dominates ex ante compensation by underpricing alone. By forming larger syndicates underwriters can increase their capacity to sustain losses associated with after-market price stabilization. Issuer revenues are maximized by trading off the cost of forming syndicates with larger loss capacity versus the benefits of greater capacity for after-market intervention. We show that larger issues are associated with larger underpricing and with syndicates that have a larger loss capacity. Also, "hot issue" periods with a high volume of IPOs are associated with larger underpricing and syndicates with a smaller loss capacity.

JEL Classification: G12

Suggested Citation

Chowdhry, Bhagwan and Nanda, Vikram K., Stabilization, Syndication, and Pricing of Ipos (July 1994 ). Available at SSRN: https://ssrn.com/abstract=5457

Bhagwan Chowdhry (Contact Author)

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Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

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Richardson, TX 75083
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