SpringerLink
Log in

Pursuing Value Through Liquidity in IPOs: Underpricing, Share Retention, Lockup, and Trading Volume Relationships

  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

We argue that in an initial public offering (IPO), pre-IPO owners make decisions regarding underpricing, share retention, and share lockup simultaneously and optimally to maximize aftermarket liquidity. We predict that underpricing fosters higher trading volume in both the short run and the long run. Also, liquidity is negatively related to the proportion of shares retained by pre-IPO owners, ceteris paribus, so IPO underpricing should be positively related to the proportion of shares retained, as an offset. We document evidence consistent with these predictions. In addition, we find that, for IPOs with a lockup restriction, underpricing is more substantial and the positive relation between share retention and underpricing is much stronger. We also find that the relationship between underpricing and trading volume is stronger for IPOs with lockup. IPOs with lockup have higher trading volume, and a significant portion of this difference is associated with the effect of underpricing.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Subscribe and save

Springer+ Basic
EUR 32.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or Ebook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Aggarwal, R. K., L. Krigman and K. L. Womack, “Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling.” Journal of Financial Economics 66, 105–137, (2002).

    Article  Google Scholar 

  • Allen, R. and G. R. Faulhaber, “Signaling by Underpricing in the IPO Market.” Journal of Financial Economics 23, 303–323, (1989).

    Article  Google Scholar 

  • Amihud, Y. and H. Mendelson, “Asset Pricing and the Bid-Ask Spread.” Journal of Financial Economics 17(2), 223–249, (1986).

    Article  Google Scholar 

  • Ang, J. S. and J. C. Brau, “Concealing and Confounding Adverse Signals: Insider Wealth-Maximizing Behavior in the IPO Process.” Journal of Financial Economics 73, 149–172, (2003).

    Article  Google Scholar 

  • Balvers, R. J., J. Affleck-Graves, R. E. Miller and K. Scanlon, “The Underpricing of Initial Public Offerings: A Theoretical and Empirical Reconsideration of the Adverse Selection Hypothesis.” Review of Quantitative Finance and Accounting 3, 221–239, (1993).

    Google Scholar 

  • Beatty, R. P. and J. R. Ritter, “Investment Banking, Reputation, and the Underpricing of Initial Public Offerings.” Journal of Financial Economics 15, 213–232, (1986).

    Google Scholar 

  • Bradley, D. J. and B. D. Jordan, “Partial Adjustment to Public Information and IPO Underpricing.” Journal of Financial and Quantitative Analysis 37, 595–566, (2002).

    Google Scholar 

  • Brav, A. and P. A. Gompers, “The Role of Lockups in Initial Public Offerings.” Review of Financial Studies 16, 1–29, (2003).

    Article  Google Scholar 

  • Booth, J. R. and L. Chua, “Ownership Dispersion, Costly Information, and IPO Underpricing.” Journal of Financial Economics 41, 291–310, (1996).

    Article  Google Scholar 

  • Benveniste, L. M. and P. Spindt, “How Investment Bankers Determine the Offer Price and Allocation of New Issues.” Journal of Financial Economics 24, 343–362, (1989).

    Article  Google Scholar 

  • Bradley, D. J. and B. D. Jordan, “Partial Adjustment to Public Information and IPO Underpricing.” Journal of Financial and Quantitative Analysis 37, 595–616, (2001).

    Google Scholar 

  • Butler, A. W., G. Grullon and J. P. Weston, “Stock Market Liquidity and the Cost of Issuing Equity.” Journal of Financial and Quantitative Analysis, forthcoming, (2005).

  • Carter, R. and S. Manaster, “Initial Public Offerings and Underwriter Reputation.” Journal of Finance 45, 1045–1967, (1990).

    Google Scholar 

  • Chemmanur, T. J., “The Pricing of Initial Public Offers: A Dynamic Model with Information Production.” Journal of Finance 48, 285–304, (1993).

    Google Scholar 

  • Corwin, S. A., J. H. Harris and M. L. Lipson, “The Development of Secondary Market Liquidity for NYSE-Listed IPOs.” Journal of Finance 59, 2339–2373, (2004).

    Article  Google Scholar 

  • Demers, E. and K. Lewellen, “The Marketing Role of IPOs: Evidence from Internet Stocks.” Journal of Financial Economics 68, 413–437, (2003).

    Google Scholar 

  • Downes, D. H. and R. Heinkel, “Signaling and the Valuation of Unseasoned New Issues.” Journal of Finance 37, 1–10, (1982).

    Google Scholar 

  • Ellis, K., R. Michaely and M. O’Hara, “When the Underwriter is the Market Maker: An Examination of Trading in the IPO Aftermarket.” Journal of Finance 55, 1039–1074, (2000).

    Article  Google Scholar 

  • Ellul, A. and M. Pagano, “IPO Underpricing and After-Market Liquidity.” working paper, Indiana Univ, 2004.

  • Field, L. C. and G. Hanka, “The Expiration of IPO Share Lockups.” Journal of Finance 56, 471–500, (2001).

    Article  Google Scholar 

  • Grinblatt, M. and C. Y. Huang, “Signalling and the Pricing of New Issues.” Journal of Finance 44, 383–420, (1989).

    Google Scholar 

  • Habib, M. A. and A. P. Ljungqvist, “Underpricing and Entrepreneur Wealth Losses in IPOs: Theory and Evidence.” Review of Financial Studies 14, 433–458, (2001).

    Article  Google Scholar 

  • Hanley, K. W., “The Underpricing of Initial Public Offerings and the Partial Adjustment Phenomenon.” Journal of Financial Economics 34, 231–250, (1993).

    Article  Google Scholar 

  • Ibbotson, R. G., “Price Performance of Common Stock New Issues.” Journal of Financial Economics 2, 235–272, (1975).

    Article  Google Scholar 

  • Ibbotson, R. and J. Jaffee, “Hot Issue Markets.” Journal of Finance 30, 1027–1042, (1975).

    Google Scholar 

  • Krigman, L., W. H. Shaw and K. L. Womack, “The Persistence of IPO Mispricing and the Predictive Power of Flip**.” Journal of Finance 54, 1015–1044, (1999).

    Article  Google Scholar 

  • Loughran, T. and J. Ritter, “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics 55, 361–389, (2000).

    Article  Google Scholar 

  • Loughran, T. and J. Ritter, “Why Don’t Issuers Get Upset About Leaving Money on the Table in IPOs?” Review of Financial Studies 15, 413–443, (2002).

    Article  Google Scholar 

  • Loughran, T. and J. Ritter, “Why Has IPO Underpricing Changed Over Time?” Financial Management 33, 5–37, (2004).

    Google Scholar 

  • Lowry, M. and G. W. Schwert, “IPO Market Cycles: Bubbles or Sequential Learning?” Journal of Finance 57, 1171–1200, (2002).

    Article  Google Scholar 

  • Reese, W. A., “IPO Underpricing, Trading Volume, and Investor Interest.” working paper, Tulane Univ, 2003.

  • Ritter, J. R., “The Hot Issue Market of 1980.” Journal of Business, 57, 215–241, (1984).

    Article  Google Scholar 

  • Ritter, J. R. and I. Welch, “A Review of IPO Activity, Pricing and Allocations.” Journal of Finance 57, 1795–1828, (2002).

    Article  Google Scholar 

  • Rock, K., “Why New Issues are Underpriced.” Journal of Financial Economics 15, 187–212, (1986).

    Article  Google Scholar 

  • Welch, I., “Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” Journal of Finance 44, 421–449, (1989).

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Accounting and Finance, Asper School of Business, University of Manitoba, Winnipeg, MB, Canada

    Steven X. Zheng

  2. Department of Finance and Managerial Economics, School of Management, University at Buffalo, SUNY, Buffalo, NY, 14260

    Joseph P. Ogden & Frank C. Jen

Authors
  1. Steven X. Zheng
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Joseph P. Ogden
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Frank C. Jen
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Joseph P. Ogden.

Additional information

JEL Classification: G10, G14, G24

Rights and permissions

Reprints and permissions

About this article

Cite this article

Zheng, S.X., Ogden, J.P. & Jen, F.C. Pursuing Value Through Liquidity in IPOs: Underpricing, Share Retention, Lockup, and Trading Volume Relationships. Rev Quant Finan Acc 25, 293–312 (2005). https://doi.org/10.1007/s11156-005-4769-z

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-005-4769-z

Keywords

Search

Navigation