Login | Register

The Impact of Firm and Information Production on the Aftermarket Liquidity of IPO Firms

Title:

The Impact of Firm and Information Production on the Aftermarket Liquidity of IPO Firms

Yao, Qian (2015) The Impact of Firm and Information Production on the Aftermarket Liquidity of IPO Firms. Masters thesis, Concordia University.

[img]
Preview
Text (application/pdf)
Yao_MSc_S2016.pdf - Accepted Version
1MB

Abstract

This study investigates the relationship between the aftermarket liquidity and underpricing of IPO firms by examining a sample of U.S. IPOs issued during the period 1996-2011. We first explore the relationship between stock liquidity (e.g., turnover and Amihud illiquidity) and underpricing during a one-year period after the IPO. Our results suggest that underpricing indeed boosts aftermarket liquidity and is thus in line with similar findings in the previous literature. Thus, a possible mechanism is likely to link the initial returns of IPO with lasting higher aftermarket liquidity. In this context, we propose and examine that “information production” hypothesis that IPO firms experience more information revelation to realize a “market appetite” for newly issued shares. Our empirical results demonstrate that analyst coverage, measured by the number of analysts following the IPO, and news reports, measured by the number of news mentioning the IPO firm, are two probable sources for information generation after the IPO. With a higher level of underpricing, IPO companies will certainly attract more analysts and more media coverage. Then, we check the link between information generation after the IPO and liquidity post-listing. Consistent with our expectations, there is a positive and significant relationship between the number of analysts and liquidity, and the number of news and liquidity. Based on this finding, we conclude that more information generation possibly induces attention among institutional investors and the public, which in turn causes higher aftermarket liquidity. Our study indicates that the underpricing of IPO firms serves as a possible compensation for underwriters and potential investors to obtain more analyst coverage and media attention, which is positively related to higher aftermarket liquidity.

Divisions:Concordia University > John Molson School of Business > Finance
Item Type:Thesis (Masters)
Authors:Yao, Qian
Institution:Concordia University
Degree Name:M. Sc.
Program:Administration (Finance option)
Date:September 2015
Thesis Supervisor(s):Walker, Thomas
Keywords:IPO Underpricing, Aftermarket Liquidity, Information Production
ID Code:980651
Deposited By: QIAN YAO
Deposited On:17 Jun 2016 14:34
Last Modified:23 Jul 2019 20:19

References:

Acharya, V.V., Pederse, L.H., 2005, “Asset pricing with liquidity risk”, Journal of Financial Economics. 77, 375-410.
Aggarwal, R.K., Krigman, L., Womack, K.L., 2002, “Strategic IPO underpricing, information momentum, and lockup expiration selling”, Journal of Financial Economics 66, 105-137.
Amihud, Y., 2002, “Illiquidity and stock returns: Cross-section and time-series effects”, Journal of Financial Markets 5, 31-56.
Amihud, Y., Mendelson, H., 1986, "Asset pricing and the bid-ask spread", Journal of Financial Economics 17, 223-249.
Amihud, Y., Mendelson, H., 1988, “Liquidity and asset prices: Financial management implications”, Financial Management 17: 1, 5-15.
Baron, D.P., 2012, “A model of the demand for investment banking advising and distribution services for new issues”, The Journal of Finance 37:4, 955-976.
Benveniste, L.M., Spindt, P.A., 1989, “How investment bankers determine the offer price and allocation of new issues”, Journal of Financial Economics 24, 343-361.
Booth, J.R., Chua, L., 1996, “Ownership dispersion, costly Information and IPO underpricing”, Journal of Financial Economics 41:2, 291-310.
Bradley, D.J., Jordan, B.D., 2002, “Partial adjustment to public information and IPO underpricing”, The Journal of Financial and Quantitative Analysis 37: 4, 595-616.
Brennan, J., Franks, J., 1997, “Underpricing, ownership and control in initial public offerings of equity securities in the UK”, Journal of Financial Economics 45, 391-413.
Celikyurt, U., Sevilir, M., Shivdasani, A., 2010, “Going public to acquire? The acquisition motive in IPOs”, Journal of Financial Economics 96, 345-363.
Chemmanur, T.J., 1993, “The pricing of initial public offerings: a dynamic model with information production”. Journal of Finance 48, 285-304.
Chordia, T., Roll, R., Subrahmanyam, A., 2002, “Order imbalance, liquidity, and market returns”. Journal of Financial Economics 65:1, 111-130.
Cliff, M.T., Denis, D.J., 2004, “Do initial public offering firms purchase analyst coverage with underpricing?” Journal of Finance 59, 2871-2901.
Das, S., Guo, R.J., and Zhang, H., 2006, “Analysts’s selective coverage and subsequent performance of newly public firms”. Journal of Finance 61, 1159-1185.
Domowitz, I., and J. Wang, 1994, “Auctions as algorithms: Computerized trade execution and price discovery”, Journal of Economic Dynamics and Control 18, 29-60.
Ellis, K., Michaely, R.., O'Hara, M., 2000, “When the underwriter is the market maker: an examination of trading in the IPO aftermarket”. Journal of Finance 55, 1039-1074.
Ellul, A., Pagano, M., 2006, “IPO underpricing and after-market liquidity”, The Review of Financial Studies 19:2, 381-421.
Field, L., Hanka, G., 2001, “The expiration of IPO share lockups”, Journal of Finance 56, 471-500.
Gajewski, J.F., Gresse, C., 2006, “A survey of the European IPO market”, ECMI Research Reports 2, European Capital Markets Institute, August.
32
Gajewski, J.F., Gresse, C., 2008, “IPO underpricing, post-listing liquidity, and information asymmetry in the secondary markets”, Working paper, University de Savoie.
Guerrieri, V., Shimer, R.., 2012, “Dynamic adverse selection: A theory of illiquidity, fire sales, and flight to quality”, Working Paper, University of Chicago.
Helwege, J., Liang, N., 2004, “Initial public offerings in hot and cold markets”, Journal of financial and quantitative analysis 39, 541-569.
Holmstrom, B., Tirole, J., 1993, “Market liquidity and performance monitoring”, Journal of Political Economy 101, 678-709.
Hong. H., Lim, T., Stein, J.C., 2000, “Bad news travels slowly: Size, analyst coverage, and the profitability of momentum strategies”, The Journal of Finance 55:1, 265-295.
Hughes, P.J., Thakor, A.V., 1992, “Litigation risk, intermediation, and the underpricing of initial public offerings”, Review of Financial Studies 5, 709-742.
Kennedy, D.B., Sivakumar, R., Vetzal, K.R., 2006, “The implications of IPO underpricing for the firm and insiders: Tests of asymmetric information theories”, Journal of Empirical Finance 13, 49-78.
Klibanoff, P., Lamont, O., Wizman, T.A., 1998, “Investor reaction to salient news in closed-end country funds”, The Journal of Finance 53: 2, 673-699.
Ibbotson, R.G., 1975, “Price performance of common stock new issues”, Journal of Financial Economics 2, 235-272.
Ibbotson, R.G., Jaffe, J.F., 1975, “Hot Issue Market”, the Journal of Finance 30: 4, 1027-1042.
Ibbotson, R.G., Ritter, J.R., 1995. “Initial public offerings”. In: Jarrow, R.A., Maksimovic, V., Ziemba, W.T., (Eds.), Handbooks in Operations Research and Management Science: Finance 9. North-Holland, Amsterdam, 993-1016.
Jegadeesh, N., Weinstein, M., Welch, I., 1993, “An empirical investigation of Initial public offerings and subsequent equity offerings”, Journal of Financial Economics 34, 153-175.
Jenkinson, T., Ljungqvist, A., 2001, “Going public: The theory and evidence on how companies raise equity finance”, Clarendon Press, Oxford University.
Lee, C., 2012, “Does the gross spread compensate lead underwriters for analyst coverage? ”, Accounting and Finance Research 1: 2, 36-58.
Li, M.S., Zheng, S.X., Melancon M.V., 2005, “Underpricing, share retention, and the IPO aftermarket liquidity”, International Journal of Managerial Finance 1:2, 76-94.
Loughran, T., Ritter, J.R., 2002, “Why don't issuers get upset about leaving money on the table in IPOs?”, The Review of Financial Studies 15: 2, 413-443.
Lowry, M., Officer, M., Schwert, W., 2008, “The variability of IPO initial returns”, Working Paper, Pennsylvania State University.
Mello, A., Parsons, J., 1998, “Going public and the ownership structure of the firm”, Journal of Financial Economics 49, 79-109.
Miller, R.E., Reilly, F.K., 1987, “An examination of mispricing, returns and uncertainty for initial public offerings”, Financial Management 16, 33-38.
Pham, P.K., Kalev, P.S., Steen, A.B., 2003, “Underpricing, stock allocation, ownership structure and post-listing liquidity of newly listed firms”, Journal of Banking and Finance 27, 919-947.
Popescu, M., Xu, Z., 2011, “Co-managers, Information, and the Secondary Market Liquidity of Initial Public Offerings”, Financial Management 40:1, 199-218.
Reese, W.A., 1998, “IPO underpricing, trading volume, and investor interest”, Working Paper Series, Tulane University.
Ritter, J.R., Welch, I., 2002, “A review of IPO activity, pricing, and allocations”, Journal of Finance 57, 1795-1828.
Rock, K., 1986, “Why new issues are underpriced?”, Journal of Financial Economics 15, 187-212.
Roulstone, D., 2003, “Analyst following and market liquidity”, Contemporary Accounting Research 20, 552-578.
Schultz, P.H., Zaman, M.A., 1994, “After-market support and underpricing of initial public offerings”, Journal of Financial Economics 35, 199-219.
Welch, I., 1989, “Seasoned offerings, imitation costs, and the underpricing of initial public offerings”, Journal of Finance 44, 421-449.
Zheng, S.X., Li, M.S., 2008, “Underpricing, ownership dispersion, and aftermarket liquidity on IPO stocks”, Journal of Empirical Finance 15: 3, 436-454.
All items in Spectrum are protected by copyright, with all rights reserved. The use of items is governed by Spectrum's terms of access.

Repository Staff Only: item control page

Downloads per month over past year

Research related to the current document (at the CORE website)
- Research related to the current document (at the CORE website)
Back to top Back to top