Price Support and Spreads in the IPO Aftermarket: An Empirical Microstructure Study

34 Pages Posted: 10 May 2005

See all articles by Mingsheng Li

Mingsheng Li

Bowling Green State University - College of Business Administration

Robert C. Eisenstadt

University of Louisiana at Monroe

Abstract

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

Li, Mingsheng and Eisenstadt, Robert C., Price Support and Spreads in the IPO Aftermarket: An Empirical Microstructure Study. Quarterly Review of Economics and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=716347

Mingsheng Li (Contact Author)

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Robert C. Eisenstadt

University of Louisiana at Monroe ( email )

700 University Avenue
Monroe, LA 71209
United States

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