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

Abstract

We use a natural experiment resulting from the 1997 Securities and Exchange Commission rule mandating a change in the order‐handling rules (OHR) for all NASDAQ stocks to test whether secondary market structure affects initial public offering (IPO) underpricing. We find that the increase in liquidity that the OHR represent led to a decrease in underpricing for cold NASDAQ IPOs, suggesting that when liquidity is lowest, changes in market liquidity display a negative relation to initial returns.

Regulatory Corporate Governance and the Valuation of IPO Firms

“…Underwriter ranking is important to valuation because it can serve as a signal of firm quality (Booth and Smith, 1986;Hughes, 1986;Carter and Manaster, 1990;Ljungqvist and Wilhelm, 2003;Loughran and Ritter, 2004). We include the NASDAQ dummy variable because valuations could be sensitive to the listing exchange, perhaps because of liquidity differences (Ligon and Liu, 2011).…”