Stabilization, Syndication, and Pricing of Ipos

J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1996

Posted: 20 May 1996

See all articles by Bhagwan Chowdhry

Bhagwan Chowdhry

UCLA Anderson; Indian School of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

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Abstract

We argue that in the after-market trading of an IPO, the underwriting syndicate, by standing ready to buy back shares at the offer price ("price stabilization"), compensates uninformed investors ex post for the adverse selection cost they face in bidding for IPOs. This dominates ex ante compensation by underpricing. The reason is thatstabilization exploits ex post information about investor demand whereas underpricing must be based on ex ante information. However, liquidity and syndication costs constrain the use of stabilization which, in equilibrium, generates some underpricing as well. We develop a model that formalizes this intuition and generates several empirical implications.

JEL Classification: G30

Suggested Citation

Chowdhry, Bhagwan and Nanda, Vikram K., Stabilization, Syndication, and Pricing of Ipos. J. OF FINANCIAL AND QUANTITATIVE ANALYSIS, March 1996, Available at SSRN: https://ssrn.com/abstract=7429

Bhagwan Chowdhry (Contact Author)

UCLA Anderson ( email )

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Indian School of Business ( email )

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Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

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P.O. Box 830688
Richardson, TX 75083
United States

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