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SECONDARY MARKET STABILIZATION OF IPOs

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  • William J. Wilhelm

Abstract

Underwriting syndicates routinely “stabilize” the secondary market price for poorly received initial public offerings. Price stabilization practices, particularly the use of “penalty bids” aimed at discouraging immediate resale or “flipping” of IPO shares, recently have triggered litigation and attracted the attention of the regulatory community. Much of the attention has focused on the allegation that a disproportionate share of the burden of price stabilization efforts is borne by individual investors. After describing the various practices that fall under the rubric of price stabilization, this article provides several economic rationales for what is by definition a manipulative but legal practice. It also summarizes recently published evidence characterizing the winners and losers from price stabilization and presents a number of conclusions from a recent roundtable discussion among practitioners, regulators, and academics held at the Boston College Carroll School of Management that might serve as a guide to policymakers.

Suggested Citation

  • William J. Wilhelm, 1999. "SECONDARY MARKET STABILIZATION OF IPOs," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(1), pages 78-85, March.
    • Handle: RePEc:bla:jacrfn:v:12:y:1999:i:1:p:78-85
    DOI: 10.1111/j.1745-6622.1999.tb00662.x
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    Cited by:

    1. Chong, Beng Soon & Liu, Zhenbin, 2020. "Issuer IPO underpricing and Directed Share Program (DSP)," Journal of Empirical Finance, Elsevier, vol. 56(C), pages 105-125.
    2. Sherman, Ann E. & Titman, Sheridan, 2002. "Building the IPO order book: underpricing and participation limits with costly information," Journal of Financial Economics, Elsevier, vol. 65(1), pages 3-29, July.
    3. Lokman Tutuncu, 2020. "Initial public offering price support, valuation, and returns," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 267-282, June.
    4. Robert Wright, 2002. "Reforming the US IPO market: lessons from history and theory," Accounting History Review, Taylor & Francis Journals, vol. 12(3), pages 419-437.
    5. Sturla Lyngnes Fjesme, 2019. "When do investment banks use IPO price support?," European Financial Management, European Financial Management Association, vol. 25(3), pages 437-461, June.
    6. Bessembinder, Hendrik & Jacobsen, Stacey & Maxwell, William & Venkataraman, Kumar, 2022. "Overallocation and secondary market outcomes in corporate bond offerings," Journal of Financial Economics, Elsevier, vol. 146(2), pages 444-474.
    7. Altinkilic, Oya & Hansen, Robert S., 2003. "Discounting and underpricing in seasoned equity offers," Journal of Financial Economics, Elsevier, vol. 69(2), pages 285-323, August.

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