Liquidity and Initial Public Offering Underpricing

Abstract

Booth and Chua (1996) suggest that underpricing may boost secondary market liquidity of an initial public offering (IPO), but to date there is little evidence on this point. In this study, we employ ten measures of liquidity to explore whether the underpricing of IPOs boosts subsequent secondary market liquidity for the issue. The clear preponderance of the evidence suggests it does. Underpricing increases secondary market liquidity when volume based measures and price-scaled spread and price-responsiveness measures are used to measure liquidity. This result is robust in multivariate analysis, where we control for other factors believed to influence liquidity, and holds both before and after lockup expiration.

Keywords: initial public offerings, underpricing, liquidity

JEL Classification: G10, G12, G24