Essays in market microstructure of NYSE-listed IPOs.
Thong, Tiong Yang.
Date of Issue2006
College of Business (Nanyang Business School)
In essay 1, we investigate the effect of decimalization on the aftermarket trading of NYSE-listed IPOs. We find that after decimalization, the relation between spreads and underpricing becomes negative, suggesting that benefits from the increased price competition accrue more to hot IPOs. The depths are generally smaller postdecimalization because of the higher probability of front-running that aggravates the costs of adverse selection and limit order submission. In addition, we show that underwriters still provide price support but are only willing to cover the initial short position if it is still profitable post-decimalization. We also find that decimal pricing does not change the flipping strategy of institutions for cold IPOs as flipping is likely bound by underwriter price support and shares allocation. Institutions, however, tend to flip more hot IPOs in the post- rather than pre-decimalization period, suggesting that the cost of flipping is much lower for those share prices with a substantial run-up during aftermarket trading.