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How Stock Flippers Affect IPO Pricing and Stabilization

Published online by Cambridge University Press:  06 April 2009

Raymond P. H. Fishe
Raymond P. H. Fishe
Affiliation:
pfishe@miami.edu, University of Miami, School of Business Administration, P.O. Box 248094, Coral Gables, FL 33124.
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Abstract

Stock flippers pose a problem for underwriters of initial public offerings (IPOs). They subscribe to the issue, but immediately resell their shares, which may depress the aftermarket price. This paper presents a model of how stock flippers affect IPO pricing. The model shows that the underwriter chooses whether to price the issue as a cold, weak, or hot IPO. Stock flippers have the greatest effect on pricing in weak IPOs and provide an explanation for underwriter stabilization. In contrast to existing models of stabilization, the underwriter gains from after-market purchases, particularly if the contract with the issuer includes an over-allotment option. The over-allotment option encourages a lower offer price, which may lead to under-pricing. These results correspond to recent findings on IPO returns and underwriter stabilization activities.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 2 , June 2002 , pp. 319 - 340
Copyright
Copyright © School of Business Administration, University of Washington 2002

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