The economics of IPO stabilization, syndicates and naked shorts
AbstractStabilization is the bidding for and purchase of securities by an underwriter immediately after an offering for the purpose of preventing or retarding a fall in price. Stabilization is price manipulation, but regulators allow it within strict limits â€“ notably that stabilization may not occur above the offer price. For legislators and market authorities, a false market is a price worth paying for an orderly market. This paper compares the rational for regulatorsâ€™ allowing IPO stabilization with its effects. It finds that stabilization does have the intended effects, but that underwriters also seem to have other motives to stabilize, including favouring certain aftermarket sellers and enhancing their own reputation and profits. A puzzling aspect of stabilization is why underwriters create â€˜naked shortâ€™ positions which are loss-making to cover when, as is usual, the aftermarket price rises to a premium. We set up a model to show that the lead underwriter may profit from a naked short at the expense of the rest of the syndicate given the way commissions are apportioned between them. We argue that a naked short mitigates the misalignment of interests which stabilization causes between issuer and lead underwriter, although it does so at the expense of the non-lead underwriters.
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Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2006fe14.
Date of creation: 2006
Date of revision:
IPO; stabilization; syndicates;
Other versions of this item:
- Tim Jenkinson & Howard Jones, 2007. "The Economics of IPO Stabilisation, Syndicates and Naked Shorts," European Financial Management, European Financial Management Association, vol. 13(4), pages 616-642.
- Tim Jenkinson & Howard Jones, 2006. "The economics of IPO stabilization, syndicates and naked shorts," Economics Series Working Papers 2006-FE-14, University of Oxford, Department of Economics.
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- Antonio Acconcia & Alfredo Del Monte & Luca Pennacchio, 2011. "Underpricing and Firm’s Distance from Financial Centre: Evidence from three European Countries," CSEF Working Papers 295, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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