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IPO underpricing and after-market liquidity




The underpricing of the shares sold through Initial Public Offerings (IPOs) is generally explained with asymmetric information and risk. We complement these traditional explanations with a new theory. Investors who buy IPO shares are also concerned by expected liquidity and by the uncertainty about its level when shares start trading on the after-market. The less liquid shares are expected to be, and the less predictable their liquidity is, the larger will be the amount of "money left on the table" by the issuer. We present a model that integrates such liquidity concerns within a traditional framework with adverse selection and risk. The model's predictions are supported by evidence from a sample of 337 British IPOs effected between 1998 and 2000. Using various measures of liquidity, we find that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing, after controlling for variables traditionally used to explain underpricing.

Suggested Citation

  • Andrew Ellul & Marco Pagano, 2003. "IPO underpricing and after-market liquidity," CSEF Working Papers 99, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 09 Feb 2006.
  • Handle: RePEc:sef:csefwp:99

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    References listed on IDEAS

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    More about this item


    liquidity; initial public offering; post-IPO market; after-market trading;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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