When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket


  • Katrina Ellis,

  • Roni Michaely,

  • Maureen O'Hara

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    • Australian Graduate School of Management, Cornell University and Tel-Aviv University, and Cornell University, respectively. The authors thank Dean Furbush, Tim McCormick, and Jennifer Drake of the NASD Economic Research Department for their extensive help in providing the data set in this paper. We also thank Sandie Daignault of BT/Alex Brown, Gustavo Grullon, Ananth Madhavan, Manju Puri, René Stulz, Sarah Tasker, Elizabeth Odders-White, Kent Womack, Jaime Zender, an anonymous referee, and workshop participants at Cornell University, Duke University, the London Business School, New York University, Rice University, the University of Melbourne, the University of New South Wales, the University of Queensland, the University of Sydney, the University of Technology, Sydney, the NBER Corporate Finance meeting, and the 1999 Winter Finance Conference for helpful comments.


This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three-month period after an IPO. We find that the lead underwriter is always the dominant market maker; he takes substantial inventory positions in the aftermarket trading, and co-managers play a negligible role in aftermarket trading. The lead underwriter engages in stabilization activity for less successful IPOs, and uses the overallotment option to reduce his inventory risk. Compensation to the underwriter arises primarily from fees, but aftermarket trading does generate positive profits, which are positively related to the degree of underpricing.