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Stabilization, syndication and pricing of IPOs
Open accessAbstract
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 that stabilization 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.
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“Mechanisms such as underpricing (Rock, 1986;Benveniste and Spindt, 1989) and price stabilization (Chowdhry and Nanda, 1996;Benveniste et al., 1996;Benveniste et al., 1998) are market features that address information problems.”
From The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle (1998) · cites this paper as Chowdhry and Nanda, 1996
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N. Berger, A., & F. Udell, G. (1998) · Journal of Banking & Finance · doi:10.1016/s0378-4266(98)00038-7 · Cited by 3,690
“Mechanisms such as underpricing (Rock 1986, Benveniste and Spindt 1989) and price stabilization (Chowdhry and Nanada 1996, Benveniste, Busaba and Wilhelm 1996, Benveniste, Erdal, and Wilhelm 1998) are market features that address information problems.”
Metadata
- Authors
- Chowdhry, B., & Nanda, V.
- Affiliations
- University of California, Los Angeles (US)
- University of Southern California (US)
- Venue
- The Journal of Financial and Quantitative Analysis
- Publisher
- JSTOR
- Published
- 1996-03
- Volume
- 31
- Issue
- 1
- Pages
- 25
- ISSN
- 0022-1090 (ISSN-L)
- OpenAlex
- W2096156237
- Cited by
- 177
- References
- 0
- Citations by year
- 2026: 2 · 2025: 4 · 2024: 2 · 2023: 2 · 2022: 1 · 2021: 1 · 2020: 5 · 2019: 3 · 2018: 7 · 2017: 12 · 2016: 2 · 2015: 10 · 2014: 11 · 2013: 3 · 2012: 8
- FWCI
- 8.78
- Type
- journal article
- Language
- en
- Open access
- green
- papers.ssrn.com
- Locations
- Journal of Financial and Quantitative Analysis (publishedVersion)
- Digital Eprints Services at ISB (DESI) (Indian School of Business) (submittedVersion)
- SSRN Electronic Journal (submittedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
- Social Sciences › Economics, Econometrics and Finance › Finance › Corporate Finance and Governance
- Social Sciences › Economics, Econometrics and Finance › Finance › Stochastic processes and financial applications
- Keywords
- initial public offerings, price stabilization, underwriting syndicates, IPO underpricing, adverse selection, investor demand, liquidity costs, IPO pricing
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- The paper
- Chowdhry, B., & Nanda, V. (1996). Stabilization, syndication and pricing of IPOs. The Journal of Financial and Quantitative Analysis. https://doi.org/10.2307/2331385
