IPO Price Support

Some interesting findings on IPO price support (market actions by i-banks to keep new IPOs from falling below their issue price) in a paper in the current issue of the Journal of Finance. Among the more surprising findings, it is more closely tied to retail banking than to institutional banking. Most people, including me, have thought the opposite would be true.

Risk, Reputation, and IPO Price Support
KATHARINA LEWELLEN

Immediately following an initial public offering, underwriters often repurchase shares of poorly performing offerings in an apparent attempt to stabilize the price. Using proprietary Nasdaq data, I study the price effects and determinants of price support. Some of the key findings are (1) Stabilization is substantial, inducing price rigidity at and below the offer price; (2) I find no evidence that stocks with larger information asymmetries are stabilized more strongly; (3) Larger underwriters stabilize more, perhaps to protect their reputations with investors; and (4) Investment banks with retail brokerage operations stabilize much more than other banks, inconsistent with the view that stabilization benefits primarily institutional investors.

Related posts:

  1. Bidding Under the Google Price Range
  2. The Essential Stupidity of Price Targets
  3. Housing: Difference Price, Same Market — No Arbitrage
  4. Retail Prices Changes, Then and Now
  5. Selling Rooms Online: High Price Better than No Price

Comments

  1. Bill Burnham says:

    Hi Paul, I’m sure a syndicate guy can do this better justice than I can , but from what understand a properly executed IPO is short the shoe to begin with, so every properly executed IPO can be “stablized” at roughly the same rate no matter what kind of bank underwrote the shares. Given this findings 1 and 2 should surprise no one. As for why retail banks stablize more, it’s probably because they are able to be fully short the shoe consistently and have firmer books than the average institutional shop because retail investors are not sophisticated/well advised enough to pull their orders when the book is weak and are too intimidated by their brokers to sell in the aftermarket.