How Does Underwriter Price Support Affect Ipos? Empirical Evidence

48 Pages Posted: 5 Jun 1998

See all articles by Manju Puri

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School

Date Written: December 1998

Abstract

While it is extensively documented that underwriters often "stabilize" or "support" initial public offerings (IPOs), less is known about how this practice impacts the IPO process. We argue that price support creates a short put position for underwriters, and thereby gives underwriters the incentive to reduce the ex-ante price risk of IPOs. We provide extensive empirical evidence that price support is related to IPO price risk, using several measures of support and risk. Rare data from SEC filings on price support, cross-sectional evidence from IPOs offered between 1985 and 1994, and data from two different price support regimes all indicate a negative relation between price support and the initial price risk of IPOs.

JEL Classification: G18, G24

Suggested Citation

Puri, Manju and Prabhala, Nagpurnanand, How Does Underwriter Price Support Affect Ipos? Empirical Evidence (December 1998). Available at SSRN: https://ssrn.com/abstract=95948 or http://dx.doi.org/10.2139/ssrn.95948

Manju Puri

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

Nagpurnanand Prabhala (Contact Author)

The Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
+1 410 234 4532 (Phone)

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