The positive relation between initial underpricing and liquidity in the secondary market several months after the initial public offering has been previously attributed to ownership dispersion induced by underpricing. We show that public information production can be another channel by which underpricing improves liquidity. Using a sample of IPOs undertaken on Euronext, we show that the analyst coverage engendered by initial underpricing reduces information asymmetry costs and illiquidity in the secondary market.Regarding information asymmetry, the impact is statistically more significant on measures based on adverse selection costs than on measures based on the proportion of informed traders in the market.
Our study investigates by which channels IPO underpricing impacts post-listing liquidity. Using a sample of IPOs undertaken on Euronext with diverse mechanisms, we show that when ownership structure is not influenced by initial underpricing, this underpricing still has a positive impact on aftermarket liquidity by a virtuous cycle related to analyst coverage.The analyst coverage purchased by initial underpricing reduces information asymmetry costs and illiquidity in the secondary market. The public information produced by analysts has a statistically more significant impact on adverse selection costs than on the proportion of informed traders in the market.1
Based on a survival analysis on a sample of initial public offerings (IPOs) undertaken on Euronext and their subsequent seasoned equity offerings (SEOs) over the period 1995–2012, this chapter shows that analyst coverage in the months following an IPO facilitates subsequent SEOs and favors the longevity of the firm’s relationship with its initial underwriter. SEOs are facilitated in several dimensions: post-IPO analyst coverage increases the likelihood of the IPO firm to conduct an SEO with a firm commitment underwriting; it increases the occurrence speed of that SEO; and it increases the probability of that SEO to be intermediated by the same underwriter as the IPO.
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