Price Support and Spreads in the IPO Aftermarket: An Empirical Microstructure Study
34 Pages Posted: 10 May 2005
Using the inventory components of spreads as a measure of inventory holding-risk, we test the hypothesis of Hanley, Kumar, and Seguin (1993) that price supports reduce market makers' inventory holding-risk in the aftermarket of initial public offerings (IPO). We find that both spreads and their inventory components are significantly smaller in the earlier periods of the IPO aftermarket than those in the later periods. More importantly, the inventory components of spreads are significantly smaller for stocks without over-allotment options (OAO) exercised, and for stocks with lower or negative initial returns which are more likely to have price supports. The results are consistent with the price support hypothesis.
Keywords: Initial public offerings, Price stabilization, spread components, over-allotment option
JEL Classification: G1, G14, G3, G39
Suggested Citation: Suggested Citation