SECONDARY MARKET STABILIZATION OF IPOs

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Abstract

Underwriting syndicates routinely “stabilize” the secondary market price for poorly received initial public offerings. Price stabilization practices, particularly the use of “penalty bids” aimed at discouraging immediate resale or “flipping” of IPO shares, recently have triggered litigation and attracted the attention of the regulatory community. Much of the attention has focused on the allegation that a disproportionate share of the burden of price stabilization efforts is borne by individual investors.

After describing the various practices that fall under the rubric of price stabilization, this article provides several economic rationales for what is by definition a manipulative but legal practice. It also summarizes recently published evidence characterizing the winners and losers from price stabilization and presents a number of conclusions from a recent roundtable discussion among practitioners, regulators, and academics held at the Boston College Carroll School of Management that might serve as a guide to policymakers.

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