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

Authors: Zheng, Steven¹; Ogden, Joseph²; Jen, Frank³

Source: Review of Quantitative Finance and Accounting, Volume 25, Number 3, November 2005 , pp. 293-312(20)

Publisher: Springer

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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.

Keywords: IPO; underpricing; share retention; liquidity; lockup; trading volume

Document Type: Research article

DOI: http://dx.doi.org/10.1007/s11156-005-4769-z

Affiliations: 1: Department of Accounting and Finance, Asper School of Business, University of Manitoba, Winnipeg, MB, Canada, Email: zhengxs@ms.umanitoba.ca 2: Department of Finance and Managerial Economics, School of Management, University at Buffalo, SUNY, Buffalo, NY, 14260, Email: joeogden@buffalo.edu 3: Department of Finance and Managerial Economics, School of Management, University at Buffalo, SUNY, Buffalo, NY, 14260, Email: yingchi@juno.com

Publication date: 2005-11-01