Hostname: page-component-78c5997874-8bhkd Total loading time: 0 Render date: 2024-11-15T07:27:35.388Z Has data issue: false hasContentIssue false
  • English
  • Français

How Stock Flippers Affect IPO Pricing and Stabilization

Published online by Cambridge University Press:  06 April 2009

Raymond P. H. Fishe
Raymond P. H. Fishe
Affiliation:
pfishe@miami.edu, University of Miami, School of Business Administration, P.O. Box 248094, Coral Gables, FL 33124.
Get access Rights & Permissions [Opens in a new window]

Abstract

Stock flippers pose a problem for underwriters of initial public offerings (IPOs). They subscribe to the issue, but immediately resell their shares, which may depress the aftermarket price. This paper presents a model of how stock flippers affect IPO pricing. The model shows that the underwriter chooses whether to price the issue as a cold, weak, or hot IPO. Stock flippers have the greatest effect on pricing in weak IPOs and provide an explanation for underwriter stabilization. In contrast to existing models of stabilization, the underwriter gains from after-market purchases, particularly if the contract with the issuer includes an over-allotment option. The over-allotment option encourages a lower offer price, which may lead to under-pricing. These results correspond to recent findings on IPO returns and underwriter stabilization activities.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 2 , June 2002 , pp. 319 - 340
Copyright
Copyright © School of Business Administration, University of Washington 2002

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aggarwal, R. “Stabilization Activities by Underwriters after Initial Public Offerings.” Journal of Finance, 55 (2000), 1075–1104.CrossRefGoogle Scholar
Bagwell, L. S. “Characteristics of Shareholder Heterogeneity in Dutch Auction Stock Repurchases.” Journal of Finance, 47 (1992), 71–105.CrossRefGoogle Scholar
Baron, D. P. “A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues.” Journal of Finance, 37 (1982), 955–976.CrossRefGoogle Scholar
Beatty, R., and Ritter, J. R.. “Investment Banking, Reputation, and the Underpricing of Initial Public Offerings.” Journal of Financial Economics, 15 (1986), 213–232.CrossRefGoogle Scholar
Benveniste, L. M., and Busaba, W. Y.. “Bookbuilding versus Fixed Price: An Analysis of Competing Strategies for Marketing IPOs.” Journal of Financial and Quantitative Analysis, 32 (1997), 383–404.CrossRefGoogle Scholar
Benveniste, L. M.; Busaba, W. Y.; and Guo, R.-J.. “The Option to Withdraw IPOs during the Premarket: Strategic Value.” Journal of Financial Economics, 60 (2001), 73–102.Google Scholar
Benveniste, L. M.; Busaba, W. Y.; and Wilhelm, W. J. Jr, “Price Stabilization as a Bonding Mechanism in New Equity Issues.” Journal of Financial Economics, 42 (1996), 223–255.CrossRefGoogle Scholar
Benveniste, L. M.; Busaba, W. Y.; and Wilhelm, W. J. Jr, “Information Externalities in Primary Equity Markets.” Working Paper, Univ. of Minnesota (07 1999).Google Scholar
Benveniste, L. M.; Erdal, S. M.; and Wilhelm, W. J. Jr, “Who Benefits from Secondary Market Price Stabilization of IPOs?” Journal of Banking and Finance, 22 (1998), 741–767.CrossRefGoogle Scholar
Benveniste, L. M., and Spindt, P. A.. “How Investment Bankers Determine the Offer Price and Allocation of Initial Public Offerings.” Journal of Financial Economics, 24 (1989), 343–362.CrossRefGoogle Scholar
Chen, H.-C., and Ritter, J. R.. “The Seven Percent Solution.” Journal of Finance, 55 (06 2000), 1105–1132.CrossRefGoogle Scholar
Chowdhry, B., and Nanda, V., “Stabilization, Syndication, and Pricing of IPOs.” Journal of Financial and Quantitative Analysis, 31 (1996), 25–42.CrossRefGoogle Scholar
Cornelli, F., and Goldreich, D.. “Bookbuilding and Strategic Allocation.” Working Paper, Institute of Finance and Accounting, London Business School (03 1999).CrossRefGoogle Scholar
Cornelli, F., and Goldreich, D.. “Bookbuilding: How Informative is the Order Book?” Working Paper, Institute of Finance and Accounting, London Business School (03 2000).Google Scholar
Ellis, K.; Michaely, R.; and O'Hara, M.. “When the Underwriter is the Market Maker: An Examination of Trading in the IPO Aftermarket.” Journal of Finance, 55 (2000), 1039–1074.CrossRefGoogle Scholar
Hanley, K. W.; Kumar, A. A.; and Seguin, P. J.. “Price Stabilization in the Market for New Issues.” Journal of Financial Economics, 34 (1993), 177–197.CrossRefGoogle Scholar
Hanley, K. W.; Lee, C. M. C.; and Seguin, P. J.. “The Marketing of Closed-end Fund IPOs: Evidence from Transactions Data.” Journal of Financial Intermediation, 5 (1996), 127–159.CrossRefGoogle Scholar
Hansen, R. S. “Evaluating the Costs of a New Equity Issue.” Midland Corporate Finance Journal, Spring (1986), 42–55.Google Scholar
Hansen, R. S.; Fuller, B. R.; and Janjigian, V.. “The Over-Allotment Option and Equity Financing Flotation Costs: An Empirical Investigation.” Financial Management, 16 (1987), 24–32.CrossRefGoogle Scholar
Hodrick, L. S. “Does Stock Price Elasticity Affect Corporate Financial Decisions?” Journal of Financial Economics, 52 (1999), 225–256.CrossRefGoogle Scholar
Holthausen, R.; Leftwich, R.; and Mayers, D.. “Large-Block Transactions: The Speed of Response, and Temporary and Permanent Stock-Price Effects.” Journal of Financial Economics, 26 (1990), 71–95.CrossRefGoogle Scholar
Ibbotson, R. G.; Sindelar, J. L.; and Ritter, J. R.. “Initial Public Offerings.” Journal of Applied Corporate Finance, 1 (1988), 37–45.CrossRefGoogle Scholar
Kandel, S.; Sarig, O.; and Wohl, A.. “The Demand for Stocks: An Analysis of IPO Auctions.” Review of Economic Studies, 12 (1999), 227–249.Google Scholar
Kaul, A.; Mehrotra, V.; and Morck, R.. “Demand Curves for Stocks Do Slope Down: New Evidence from an Index Weights Adjustment.” Journal of Finance, 55 (04 2000), 893–912.CrossRefGoogle Scholar
Loderer, C.; Cooney, J. W.; and Drunen, L. D. Van. “The Price Elasticity of Demand for Common Stock.” Journal of Finance, 46 (1991), 621–651.CrossRefGoogle Scholar
Muscarella, C. J.; Peavy, J. W.; and Vetsuypens, M. R.. “Optimal Exercise of the Over-Allotment Option in IPOs.” Financial Analysts Journal, 48 (1992), 76–81.CrossRefGoogle Scholar
Nanda, V., and Yun, Y.. “Reputation and Financial Intermediation: An Empirical Investigation of the Impact of IPO Mispricing on Underwriter Market Value.” Journal of Financial Intermediation, 6 (1997), 39–63.CrossRefGoogle Scholar
Persons, J. C., and Warther, V. A.. “Boom and Bust Patterns in the Adoption of Financial Innovations.” Review of Economic Studies, 10 (1997), 939–968.Google Scholar
Prabhala, N. R., and Puri, M.. “How Does Underwriter Price Support Affect IPOs? Empirical Evidence.” Working Paper, School of Management, Yale Univ. (12. 1998).CrossRefGoogle Scholar
Pichler, P., and Wilhelm, W.. “A Theory of the Syndicate: Form follows Function.” Working Paper, Boston College (02. 2000).Google Scholar
Prifti, W. M.Securities: Public and Private Offerings. St. Paul, MN: West Group (1998).Google Scholar
Ritter, J. R. “Initial Public Offerings.” InWarren, Gorham, and Lamont Handbook of Modern Finance, Logue, D. and Seward, J., eds. Boston, MA and New York, NY: WGL/RIA (1998).Google Scholar
Rock, K. “Why New Issues are Underpriced.” Journal of Financial Economics, 15 (1986), 187–212.CrossRefGoogle Scholar
Schultz, P. H., and Zaman, M. A.. “Aftermarket Support and Underpricing of Initial Public Offerings.” Journal of Financial Economics, 35 (1994), 199–219.CrossRefGoogle Scholar
Securities and Exchange Commission. Anti-manipulation Rules Concerning Securities Offerings. Release No. 34–38067 (04 1997).Google Scholar
Stoll, H. R., and Whaley, R. E.. Futures and Options: Theory and Applications. Cincinnati, OH: South-Western Publishers (1993).Google Scholar