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Primary market characteristics and secondary market frictions of stocks

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  • Boehme, Rodney
  • Çolak, Gönül
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    Abstract

    We analyze the primary market characteristics and the secondary market trading frictions of new stocks. IPOs issued in hot markets, with low offer price, low-reputation underwriters or no VC backing face higher liquidity frictions, higher information constraints, and worse short-sale constraints. Underpriced IPOs are more liquid and more recognizable, but they have higher idiosyncratic risk and higher short-sale constraints. Also, we find an interesting time trend in the evolution of the new stocks' trading frictions: the mean-reversion of an average IPO stock toward a typical seasoned stock takes more than a few years. We propose a quality-based explanation for these findings.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 15 (2012)
    Issue (Month): 2 ()
    Pages: 286-327

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    Handle: RePEc:eee:finmar:v:15:y:2012:i:2:p:286-327

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    Web page: http://www.elsevier.com/locate/finmar

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    Keywords: Idiosyncratic risk; Information uncertainty; Initial public offerings; Liquidity; Market frictions; Short-sale constraints;

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    Cited by:
    1. Gonul Colak, 2012. "IPO characteristics of index firms," Managerial Finance, Emerald Group Publishing, vol. 38(12), pages 1134-1159.

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