Why do IPO issuers grant overallotment options to underwriters?

Can ESG activities stabilise IPO prices? Evidence from the Hong Kong stock market

“…This study contributes to existing literature in several ways. First, it bridges the gap in literature by directly linking ESG activities to price stabilisation, which to the best of our knowledge, is the first study to do the same, as prior studies have mainly focused on only one aspect at a time, that is, either ESG activities determinants (Artiach et al, 2010;Nguyen & Nguyen, 2020) or price stabilisation factors and influences (Carvalho et al, 2020;Jiao et al, 2017;Mazouz et al, 2013;Schultz & Zaman, 1994). Our results suggest that ESG activity increase can stimulate more price stabilisation, consequently, allowing IPO issuers to disclose additional information, further enhancing information transparency and increasing the IPOs' survival chance.…”

“…As a form of price manipulation (Boulton & Braga‐Alves, 2020), it can reduce aftermarket volatility and improve market efficiency (Jenkinson & Jones, 2007). It can also offer IPOs with less negative aftermarket performance (Aggarwal, 2000; Bajo et al, 2017; Jiao et al, 2017), better efficiency in compensating uninformed investors (Chowdhry & Nanda, 1996), reduced risk (Mazouz et al, 2017), and higher aftermarket liquidity (Meles et al, 2021). Additionally, this action can reduce investors from possible reneging on IPO investments, caused by a drop in the aftermarket price (Schultz & Zaman, 1994).…”

“…Prior studies find that the ex‐ante demand conditions (Mazouz et al, 2013), underwriter characteristics (Bajo & Raimondo, 2017; Carvalho et al, 2020; Lewellen, 2006; Mazouz et al, 2017), IPOs proceeds (Jiao et al, 2017; Tutuncu, 2020) and the under‐pricing phenomenon (Baker et al, 2021; Lowry & Murphy, 2007) profoundly affect price stabilisation activities.…”

“…Theoretical arguments provide mixed evidence on IPO issuers' ESG activities. From the stakeholder theory perspective (Russo & Perrini, 2010), voluntarily disclosing ESG activities satisfies stakeholders' ‘right‐to‐know’ towards the social licence of a firm's operation by becoming the stakeholders' communication tool (Harasheh, 2022), reduces information asymmetry (Reber et al, 2022; Siew et al, 2016; Singhania & Saini, 2021), garners attention from investors (Barber & Odean, 2008), boosts the IPO trading volumes (Berry & Howe, 1994), and reduces the idiosyncratic volatility and downside tail risks (Jiao et al, 2017; Lowry et al, 2010; Reber et al, 2022). Consequently, IPOs can continuously increase firm value (Fatemi et al, 2015; Giese et al, 2019), enhance operating and financial performance (Borghesi et al, 2014; Gao & Zhang, 2015; Gillan et al, 2010), generate positive stock returns (Cornett et al, 2016; Edmans, 2011), and reduce the negative link between managerial entrenchment and firm value (Ferrell et al, 2016).…”

“…Regulators in many countries tolerate IPO price stabilisation, considering its positive role in mitigating price volatility. While in some markets, including Hong Kong and Brazil, underwriters are not allowed to take naked short positions (Carvalho et al, 2020;Jiao et al, 2017;Lewellen, 2006;Mazouz et al, 2013Mazouz et al, , 2017Schultz & Zaman, 1994), in others, such as the United States and Italy, underwriters can establish short positions larger than the OAO scale (Aggarwal, 2000;Boreiko & Lombardo, 2011;Ruud, 1993). Meanwhile, stabilisation-related disclosures required by regulators vary worldwide.…”