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Decimalization, IPO aftermath, and liquidity

Author

Listed:
  • Charlie Charoenwong

    (Nanyang Technological University)

  • David K. Ding

    (Massey University
    Singapore Management University)

  • Tiong Yang Thong

    (James Cook University Australia)

Abstract

We investigate the effect of decimalization on the aftermarket trading of NYSE-listed IPOs. We find that the relation between bid–ask spread and underpricing becomes negative post-decimalization, suggesting that benefits from the increased price competition accrue more to hot IPOs. The quoted depth is generally smaller post-decimalization due to a higher probability of front running, which aggravates the cost of adverse selection and limit order submission. We show that underwriters continue to provide price support but are only willing to cover the initial short position, if profitable to do so. Decimal pricing does not affect the flipping strategy of institutions for cold IPOs as they are likely bound by the underwriter’s price support and their share allocation. Institutions, however, tend to flip more hot IPOs during the post- than in the pre-decimalization period, suggesting that the cost of flipping is lower for shares with a substantial price run-up during aftermarket trading.

Suggested Citation

  • Charlie Charoenwong & David K. Ding & Tiong Yang Thong, 2016. "Decimalization, IPO aftermath, and liquidity," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1303-1344, November.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:4:d:10.1007_s11156-015-0539-8
    DOI: 10.1007/s11156-015-0539-8
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    More about this item

    Keywords

    Decimalization; IPO aftermath; Underpricing; Liquidity;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G19 - Financial Economics - - General Financial Markets - - - Other

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