Liquidity and Initial Public Offering Underpricing

Primary market characteristics and secondary market frictions of stocks

“…Ellul and Pagano (2006), for example, explain an IPO's underpricing with investors' expectation of its stock's illiquidity in the after-market. Hanley (1993), Schultz and Zaman (1994), Reese (1998), and Hahn and Ligion (2004) also document the positive relation between the underpricing and the liquidity of a stock. Gajewski and Gresse (2008) investigate the same relationship for the Euronext IPOs.…”

Underpricing, ownership dispersion, and aftermarket liquidity of IPO stocks

“…Hahn and Ligon (2004) run a regression for underpricing using price as an independent variable, then use the residual from the regression as independent variable to test the relation between spreads and underpricing. We also tried this method and find that it does not change the results if average aftermarket price is used to estimate residual initial return.…”

The Effect of the Trading System on Ipo Underpricing: Evidence From the 1997 Order-Handling Rules

“…Under this view, initial returns are exogenous with respect to the expected aftermarket liquidity of an individual issue, and a positive relation is expected between underpricing and observed aftermarket liquidity in the general cross‐section. With the exception of Ellul and Pagano's own empirical results, the literature universally finds a positive relation between underpricing and actual secondary market liquidity of individual issues (see, e.g., Pham, Kalev, and Steen 2003; Zheng and Li 2008; Hahn and Ligon 2009), although other than Ellul and Pagano, Hahn and Ligon (2009) are the only authors to control for the potential endogeneity of initial returns. The Booth and Chua argument, however, suggests nothing about the relation between a change in the liquidity of an overall market and initial returns.…”

“…Lewellen (2006), for example, suggests that even honest and competent banks can make mistakes and overprice their IPOs. However, given that the literature has shown that liquidity of new offerings is predictable by factors known at the time of the offering (see, e.g., Hahn and Ligon 2009), it seems reasonable to assume that underwriters can form some beliefs regarding the differential liquidity of issues and do not price the issue as aggressively as they otherwise would. Thus, it seems reasonable to conclude that cold issues are a surprise, but not a total surprise, to the underwriter.…”