Liquidity Benefits from IPO Underpricing: Ownership Dispersion or Information Effect.

Summary Our study investigates by which channel(s) initial underpricing positively impacts liquidity in the secondary market several months after the initial public offering. Whereas this positive impact has been previously attributed to the ownership dispersion induced by underpricing, we show that this theory cannot be generalized to all stock markets, and that public information production can be another channel by which underpricing contributes to improving liquidity. Using a sample of IPOs undertaken on Euronext, we show that the analyst coverage engendered by initial underpricing reduces information asymmetry costs and illiquidity in the secondary market. Regarding information asymmetry, the impact is statistically more significant on measures based on adverse selection costs than on measures based on the proportion of informed traders in the market.