Abstract
The paper examines the determinants of stabilization and its impact on the aftermarket prices. We use a unique dataset to relax several assumptions in the stabilization literature. We find that underwriters support IPO prices shortly after listing, particularly in cold markets and when demand is weak. We also show that stabilized IPOs are more common amongst reputable underwriters. This finding suggests that stabilization may be used as a mechanism to protect the underwriter’s reputation. It also implies that reputable underwriters may possess private information and price IPOs closer to their true values (i.e., higher than those indicated by the weak premarket demand). Consistent with the latter view, we show that stabilized IPOs are offered at higher prices and suffer less underpricing than those indicated by the premarket demand, firm characteristics and market-wide conditions. The post-IPO performance results indicate that stabilized IPOs are unlikely to be mispriced as their prices do not exhibit any significant reversal after the initial stabilization period. We conclude that stabilization may be superior to underpricing as it protects investors from purchasing overpriced IPOs, benefits issuers by reducing the total money “left on the table” and enhances the overall profitability of underwriters.
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Notes
Exceptions are: Boreiko and Lombardo (2009), who examine the determinants of underwriters’ decisions to stabilize Italian IPOs and the factors that influence stabilization intensity; Lombardo (2007), who provides a thorough comparison, from legal and economic perspectives, of regulation relating to the stabilization of IPOs in the European Union and the US; and Chung et al. (2000), who report that overallotment options (OAOs) are granted less frequently by Canadian IPOs, that there is a positive relation between underwriting fees and OAOs inclusion, and that OAOs do not play a significant role in the stabilization of Canadian IPOs.
Schultz and Zaman (1994, p. 202, fn. 2) suggest that, except if the security is sold on a when-distributed basis, Federal Reserve Regulation T allows investors to pay for their purchases within 7 days from the day that the security is made available by the issuer or is distributed (i.e., the closing date). The authors also indicate that brokers believe that a binding contract between the broker and the IPO investor does not exist until the customer has had a chance to carefully examine the final prospectus.
This is the date from which time underwriters were required to provide detailed information about their stabilization activities.
For introductions and placings, the shares are usually sold to a restricted circle of investors who are mainly institutions and wealthy individuals selected or approved by the issuer and/or underwriters. These offerings are excluded as they do not disclose information relating to their offerings. Similarly, firms transferred from GEM to the Main Board are excluded as they are not actually IPOs.
In the case of joint lead underwriters, the proceeds are split equally among them.
When we repeat the analysis using UndFreq instead of UndProc as a measure of underwriters’ reputations, our conclusions remain unchanged. Details are available upon request.
In order to obtain a better insight into the impact of self-selection adjustments on various determinants of underpricing, we estimate the parameters of the underpricing equations without the IMRs. Our (unreported) results suggest that self-selection adjustments affect the sign, the magnitude, and the statistical significance of the different explanatory variables. This evidence is consistent with the view that failure to control for choice selectivity can yield biased estimates of expected underpricing. More details on these results are available upon request.
Details of the estimation results are available upon request.
We also examined size-adjusted IPO returns, where the size-matched firm is a non-IPO firm (active with three-year trading history) closest in market value of equity to the IPO firm in question, but the results remained unchanged.
Because the Jarque–Bera test suggests that the commission fees data is not normally distributed, the non-parametric Mann–Whitney test is likely to be reliable.
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Acknowledgments
The authors would like to thank the Editor Prof. Cheng-Few Lee and two anonymous reviewers for their thoughtful comments and suggestions.
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Mazouz, K., Agyei-Ampomah, S., Saadouni, B. et al. Stabilization and the aftermarket prices of initial public offerings. Rev Quant Finan Acc 41, 417–439 (2013). https://doi.org/10.1007/s11156-012-0315-y
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DOI: https://doi.org/10.1007/s11156-012-0315-y