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The Relationship Between Overallotment Options, Underwriting Fees and Price Stabilization For Canadian IPOs

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  • Richard Chung

    (Concordia University, Canada)

  • Lawrence Kryzanowski

    (Concordia University, Canada)

  • Ian Rakita

    (Concordia University, Canada)

Abstract

The overallotment option (OAO) gives underwriters the right to acquire additional shares from the issuing firm at the offer price (less underwriting fees) in order to meet any excess demand for an issue. Thus, underwriters can use overallotment options to stabilize market prices post-issue by increasing the supply of shares for oversold issues. Unlike IPOs in the U.S., the Canadian evidence finds that OAOs are included less frequently, that underwriting fees are positively associated with OAO inclusion, and that the OAO appears to play a minor role in market price stabilization, which is itself less detectable and appears to be limited to the very early stages of secondary market trading. These results suggest that the role of the OAO differs markedly for IPOs in Canadian versus U.S. markets.

Suggested Citation

  • Richard Chung & Lawrence Kryzanowski & Ian Rakita, 2000. "The Relationship Between Overallotment Options, Underwriting Fees and Price Stabilization For Canadian IPOs," Multinational Finance Journal, Multinational Finance Journal, vol. 4(1-2), pages 5-34, March-Jun.
    • Handle: RePEc:mfj:journl:v:4:y:2000:i:1-2:p:5-34
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    References listed on IDEAS

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    Cited by:

    1. Killins, Robert N., 2019. "An investigation of the short-term performance of the Canadian IPO market," Research in International Business and Finance, Elsevier, vol. 47(C), pages 102-113.
    2. Bajo, Emanuele & Barbi, Massimiliano & Petrella, Giovanni, 2017. "Do firms get what they pay for? A second thought on over-allotment option in IPOs," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 219-232.
    3. Lawrence Kryzanowski & Skander Lazrak & Ian Rakita, 2005. "The Behavior of Prices, Trades and Spreads for Canadian IPO’s," Multinational Finance Journal, Multinational Finance Journal, vol. 9(3-4), pages 215-236, September.
    4. Oehler, Andreas & Rummer, Marco & Smith, Peter N., 2004. "The Existence and Effectiveness of Price Support Activities in Germany: A Note," Discussion Papers 30, University of Bamberg, Chair of Finance.
    5. Kryzanowski, Lawrence & Lazrak, Skander & Rakita, Ian, 2010. "Behavior of liquidity and returns around Canadian seasoned equity offerings," Journal of Banking & Finance, Elsevier, vol. 34(12), pages 2954-2967, December.
    6. Khelifa Mazouz & Sam Agyei-Ampomah & Brahim Saadouni & Shuxing Yin, 2013. "Stabilization and the aftermarket prices of initial public offerings," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 417-439, October.
    7. Samy Ben Naceur & Samir Ghazouani, 2003. "Soutien Des Cours Et Sous-Evaluation Des Introductions Sur Le Nouveau Marche," Working Papers 0320, Economic Research Forum, revised 07 Oct 2003.
    8. Jiao, Yawen & Kutsuna, Kenji & Smith, Richard, 2017. "Why do IPO issuers grant overallotment options to underwriters?," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 34-47.
    9. George J. Papaioannou & Nickolaos G. Travlos, 2000. "Special Issue on Initial Public Offerings," Multinational Finance Journal, Multinational Finance Journal, vol. 4(1-2), pages 1-4, March-Jun.

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    More about this item

    Keywords

    initial public offerings; overallotment options; price stabilization; underwriting fees;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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