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Liquidity Benefits from IPO Underpricing: Ownership Dispersion or Information Effect
Author(s) -
Bouzouita Nesrine,
Gajewski JeanFrançois,
Gresse Carole
Publication year - 2015
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12085
Subject(s) - initial public offering , market liquidity , information asymmetry , adverse selection , business , monetary economics , dispersion (optics) , financial system , finance , economics , physics , optics
The positive correlation between initial underpricing and liquidity in the secondary market several months after an initial public offering (IPO) has previously been attributed to ownership dispersion induced by underpricing. We find that public information production is another channel by which underpricing improves liquidity. Using a sample of IPOs from Euronext, we find that analyst coverage engendered by initial underpricing reduces information asymmetry costs and illiquidity in the secondary market. The impact of information asymmetry is statistically more significant on measures based on adverse selection costs than on those based on the proportion of informed traders in the market.