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How Stock Flippers Affect IPO Pricing and Stabilization

Raymond P. H. Fishe
The Journal of Financial and Quantitative Analysis
Vol. 37, No. 2 (Jun., 2002), pp. 319-340
DOI: 10.2307/3595008
Stable URL: http://www.jstor.org/stable/3595008
Page Count: 22
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
How Stock Flippers Affect IPO Pricing and Stabilization
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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 after-market 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.

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