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When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket

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  • Katrina Ellis
  • Roni Michaely
  • Maureen O'Hara

Abstract

This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three‐month period after an IPO. We find that the lead underwriter is always the dominant market maker; he takes substantial inventory positions in the aftermarket trading, and co‐managers play a negligible role in aftermarket trading. The lead underwriter engages in stabilization activity for less successful IPOs, and uses the overallotment option to reduce his inventory risk. Compensation to the underwriter arises primarily from fees, but aftermarket trading does generate positive profits, which are positively related to the degree of underpricing.

Suggested Citation

  • Katrina Ellis & Roni Michaely & Maureen O'Hara, 2000. "When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket," Journal of Finance, American Finance Association, vol. 55(3), pages 1039-1074, June.
    • Handle: RePEc:bla:jfinan:v:55:y:2000:i:3:p:1039-1074
    DOI: 10.1111/0022-1082.00240
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