Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-13T09:21:37.541Z Has data issue: false hasContentIssue false
  • English
  • Français

Market-Making in Initial Public Offerings of Common Stocks:An Empirical Analysis

Published online by Cambridge University Press:  06 April 2009

Shantaram P. Hegde  and
Robert E. Miller
Get access Rights & Permissions [Opens in a new window]

References

In this paper, we examine the behavior of the bid-ask spreads of initial public offerings of common stocks (IPOs) in the over-the-counter market. We find that, in the initial aftermarket, the quoted percentage bid-ask spreads for IPOs are, on average, about threefourths as large as those for seasoned stocks. A cross-sectional and time-series simultaneous equations analysis indicates that significant differences in the IPO and seasoned spreads persist for eight weeks in the aftermarket. Further, we find that the lower IPO spreads stem from their differential elasticities with respect to the determinants of bid-ask spreads and volume as well as from significant differences in the levels of these determinants.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 1 , March 1989 , pp. 75 - 90
Copyright
Copyright © School of Business Administration, University of Washington 1989

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barnea, A. “Performance Evaluation of New York Stock Exchange Specialists.” Journal of Financial and Quantitative Analysis, 9 (09 1974), 511–535.CrossRefGoogle Scholar
Baron, D. P. “A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues. Journal of Finance, 37 (09 1982), 955–976.CrossRefGoogle Scholar
Beatty, R. P., and Ritter, J. R.. “Investment Banking, Reputation and the Underpricing of Initial Public Offerings.” Journal of Financial Economics, 15 (03, 1986), 213–232.CrossRefGoogle Scholar
Bhagat, S., and Frost, P. A.. “Issuing Costs to Existing Shareholders in Competitive and Negotiated Underwritten Public Utility Equity Offerings.” Journal of Financial Economics, 15 (03 1986), 233–259.CrossRefGoogle Scholar
Branch, B., and Freed, W.. “Bid-Asked Spreads on the Amex and the Big Board.” Journal of Finance, 32 (03 1977), 159–163.Google Scholar
Constantinides, G. M. “Capital Market Equilibrium with Transaction Costs.” Journal of Political Economy, 94 (08 1986), 842–862.CrossRefGoogle Scholar
Copeland, T. E. “A Model of Asset Trading under the Assumption of Sequential Information Arrival.” Journal of Finance, 31 (09 1976), 1149–1168.CrossRefGoogle Scholar
Copeland, T. E., and Galai, D.. “Information Effects on the Bid-Ask Spread.” Journal of Finance, 38 (12 1983), 1457–1469.Google Scholar
Easley, D., and O'Hara, M.. “Price, Trade Size and Information Securities Markets.” Journal of Financial Economics, 19 (09 1987), 69–90.CrossRefGoogle Scholar
Epps, T. W. “The Demand for Brokers' Services: The Relation between Security Trading Volume and Transaction Cost.” Bell Journal of Economics, 7 (Spring 1976), 163–194.CrossRefGoogle Scholar
Glosten, L. R., and Milgrom, P. R.. “Bid, Ask, and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.’ Journal of Financial Economics, 14 (03 1985), 71–100.CrossRefGoogle Scholar
Glosten, L. R., and Harris, L. E.. “Estimating the Components of the Bid/Ask Spread.” Working Paper, Northwestern Univ., Evanston, IL (1986).Google Scholar
Hamilton, J. L. “Market Place Fragmentation, Competition, and the Efficiency of the Stock Exchange.” Journal of Finance, 34 (03 1979), 171–187.CrossRefGoogle Scholar
Harris, L., and Gurel, E.. “Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures.” Journal of Finance, 41 (09 1986), 815–829.CrossRefGoogle Scholar
Hess, A. C., and Frost, P. A.. “Tests for Price Effects of New Issues of Seasoned Securities.” Journal of Finance, 37 (03 1982), 11–26.CrossRefGoogle Scholar
Ho, T. S. Y., and Macris, R. G.. “Dealer Bid-Ask Quotes and Transaction Prices: An Empirical Study of Some Amex Options.” Journal of Finance, 39 (03 1984), 23–45.Google Scholar
Ho, T. S. Y., and Stoll, H. R.. “On Dealer Markets under Competition.” Journal of Finance, 35 (05 1980), 259–268.CrossRefGoogle Scholar
Ibbotson, R. G. “Price Performance of Common Stock New Issues.” Journal of Financial Economics, 2 (09 1975), 235–272.CrossRefGoogle Scholar
Parsons, J. E., and Raviv, A.. “Underpricing of Seasoned Issues.” Journal of Financial Economics, 14 (12 1985), 377–397.CrossRefGoogle Scholar
Scholes, M. S. “The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices.” Journal of Business, 45 (04 1972), 179–211.CrossRefGoogle Scholar
Shleifer, A. “Do Demand Curves for Stocks Slope Down?” Journal of Finance, 41 (07 1986), 579–590.CrossRefGoogle Scholar
Smith, C. W. Jr, “Investment Banking and the Capital Acquisition Process.” Journal of Financial Economics, 15 (03 1986), 3–29.CrossRefGoogle Scholar
Stoll, H. R. “The Supply of Dealer Services in Securities Markets.” Journal of Finance, 33 (09 1978), 1133–1151.CrossRefGoogle Scholar
Stoll, H. R. “The Pricing of Security Dealer Services: An Empirical Study of NASDAQ Stocks.” Journal of Finance, 33 (09 1978b), 1153–1172.CrossRefGoogle Scholar
Stoll, H. R. “Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests.” Working Paper, Vanderbilt Univ. (1988).Google Scholar
Theil, H.Principles of Econometrics. New York: John Wiley & Sons, Inc. (1971).Google Scholar