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THE EFFECT OF THE TRADING SYSTEM ON IPO UNDERPRICING: EVIDENCE FROM THE 1997 ORDER-HANDLING RULES

Authors


  • We thank Mike Adams, Carol Carroll, Tom Downs, Brian Gray, and an anonymous referee for comments on prior drafts. We also thank Jay Ritter and the University of Florida for making some of the data publicly available through the university's website. Remaining errors are our own.

Abstract

We use a natural experiment resulting from the 1997 Securities and Exchange Commission rule mandating a change in the order-handling rules (OHR) for all NASDAQ stocks to test whether secondary market structure affects initial public offering (IPO) underpricing. We find that the increase in liquidity that the OHR represent led to a decrease in underpricing for cold NASDAQ IPOs, suggesting that when liquidity is lowest, changes in market liquidity display a negative relation to initial returns.

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