IPO Underpricing, Post-Listing Liquidity, and Information Asymmetry in

the Secondary Market

J ean-Franois Gajewski
Universit de Savoie, IREGE, IMUS
e-mail: gajewski@univ-savoie.fr
Carole Gresse
Universit Paris Dauphine, DRM, CEREG
e-mail: carolegresse@hotmail.com
September 2007
In progress, not to be quoted
Abstract
Using a sample of IPOs undertaken on Euronext between 1995 and 2004, our study examines
the relationship between initial returns and post-listing liquidity, and tests whether it is
influenced by ownership structure and information asymmetry. Our findings partially validate
the liquidity-promotion hypothesis, as post-listing turnover is positively related to initial
underpricing, but this liquidity effect cannot be assigned to ownership dispersion. It is more
likely attributable to the interest underpriced stocks generate. Information asymmetry is
negatively linked to the level of initial underpricing, suggesting that more public information
is produced on more underpriced IPOs.
JEL classification: G12, G14, G32
Keywords: IPO, initial underpricing, ownership structure, post-listing liquidity,
information asymmetry

IPO Underpricing, Post-Listing Liquidity, and Information Asymmetry in
the Secondary Market


Abstract
Using a sample of IPOs undertaken on Euronext between 1995 and 2004, our study examines
the relationship between initial returns and post-listing liquidity, and tests whether it is
influenced by ownership structure and information asymmetry. Our findings partially validate
the liquidity-promotion hypothesis, as post-listing turnover is positively related to initial
underpricing, but this liquidity effect cannot be assigned to ownership structure. It is more
likely attributable to the interest underpriced stocks generate. Information asymmetry is
negatively linked to the level of initial underpricing, suggesting that more public information
is produced on more underpriced IPOs.


3
IPO Underpricing, Post-Listing Liquidity, and Information Asymmetry in
the Secondary Market
Articles documenting the average underpricing of initial public offerings are legion: they
report average positive initial returns in all markets at all times (Ritter and Welch, 2002), with
time-varying (Loughran and Ritter, 2002) and country-depending mean levels, as well as
large cross-sectional variances (Gajewski and Gresse, 2006). It has given rise to a large body
of theoretical literature, and the cross-section of newly listed stocks initial returns has been
utilised to test which theories best explained initial underpricing. Oldest models such as Rock
(1986) attribute initial underpricing to the information asymmetry between investors about the
value of the candidate firm and interpret it as a cost to bear by issuers to attract uninformed
investors in the primary market. Ever since, other explanations have been proposed: price
support, underwriters behaviour, analysts or investors over-optimism etc. Recently, initial
underpricing has been related to secondary markets quality, and in particular liquidity, with
divergent empirical findings between the US markets and the UK market.
Several empirical studies are supportive of the notion that initial public offering underpricing
boosts the subsequent secondary market liquidity of the stock. Miller and Reilly (1987),
Hanley (1993), Schultz and Zaman (1994), Reese (1998), and Hahn and Ligon (2004)
documented that underpriced IPOs, on average, exhibit higher after-market trading activity
than overpriced IPOs. Pham, Kalev and Steen (2003) and Li, Zheng and Melancon (2005)
evidence that a higher level of underpricing lead to not only increased trading turnover but
also lower bid-ask spreads. Pham et al. (2003) argue that this relationship is formed through
the mediation of ownership structure resulting from the allocation process. Alternatively,
Reese (1998) assigns the positive relationship between underpricing and post-listing liquidity
to financial media coverage which reduces information asymmetry, a thesis corroborated by
the results of Li, McInish and Wongchoti (2005) for a sample of NASDAQ IPOs between
1995 and 2000. In contrast, Ellul and Pagano (2006) demonstrate that initial underpricing can
be an increasing function of the expected post-listing illiquidity due to asymmetric
information because IPO underpricing compensates uninformed investors who participate in
the issue for the expected trading adverse selection costs that they will bear in the after-
market. In addition, they provide empirical evidence in support of their theory using a sample
of UK IPOs.

4
This research is an empirical test that aims at departing between the different theories
regarding this matter. Using a sample of IPOs undertaken at Euronext Paris between 1995 and
2004, we investigate the following questions. Does initial underpricing boost post-IPO
liquidity, or conversely, is it a compensation for after-market illiquidity and asymmetric
information? Provided that underpricing enhances after-market liquidity, does it result from
the broader ownership that underpricing permits to achieve (Booth and Chuas theory), is it
that underpricing induces more interest from investors in the immediate post-IPO period?
Does underpricing results in lower post-listing information asymmetry because it attracts
analysts coverage or, on the contrary, is it an increasing function of expected post-IPO
adverse selection costs?
The remainder of the article is organised as follows: Section 1 is dedicated to the testable
hypotheses and the institutional settings; Section 2 describes the sample, the data and the
variables used in the study; Sections 3 and 4 present the methodology and the results
respectively; Section 4 concludes.
1. Testable hypotheses and institutional settings
On the way underpricing relates to after-market liquidity, two theories oppose. A theory first
defended by Booth and Chua (1996) stipulates that underpricing is a means to ensure a diffuse
ownership and therefore enhance post-IPO liquidity. According to this hypothesis, which will
be designated as the liquidity-promotion hypothesis, post-listing spreads and adverse selection
measures should be negatively related to underpricing. Conversely, a more recent theory
developed by Ellul and Pagano (2006) posits that post-IPO spreads and asymmetric
information measures increase with underpricing because underpricing is a compensation for
illiquidity costs expected in the after-market. This hypothesis will be referred to as the
illiquidity-compensation hypothesis.
1.1. The liquidity-promotion hypothesis
On the one hand, an IPO candidate may desire a concentrated ownership at the expense of
liquidity so as to confer greater monitoring power to pre-IPO or new large shareholders. IPOs
seeking a concentrated ownership will not underprice their shares at the issue, as large
shareholders possess superior information about the companys true value and do not bear
information costs. They could even be overpriced as large shareholders may be prepared to
pay a premium for control.

5
On the other hand, an issuer may wish a diffuse ownership structure in order to obtain higher
secondary-market liquidity for its shares, a factor often considered as an important criterion of
success of an IPO (Corwin, Harris and Lipson, 2004). Further, a more liquid secondary
market can make corporate governance more effective (Maug, 1998). In general, higher after-
market liquidity contributes to increase the firms value and reduce its cost of capital in
several ways. It encourages analysts coverage and improves the issuing firms future access
to capital markets by attracting investors. It reduces transaction costs in future equity raisings
(Ibbotson and Ritter, 1995) and lower gross fees requested by investment banks in subsequent
equity offerings (Butler, Grullon and Weston, 2005). It also reduces the illiquidity premium
and thus the returns required by investors to hold the firms shares (Amihud and Mendelson,
1986; Brennan and Subrahmanyam, 1996). Booth and Chua (1996) demonstrate that IPO
firms seeking secondary-market liquidity will underprice their shares in order to attract a large
number of small shareholders and create a more dispersed ownership structure. Consistent
with this theory, Michaely and Shaw (1994) find higher underpricing for IPOs with more
diverse shareholder base.
We decompose the liquidity-promotion hypothesis into four testable hypotheses:
H1. More underpriced IPOs have more diffuse post-listing ownership structures.
H2a. More underpriced IPOs are characterised by a higher post-listing liquidity: higher
trading activity and tighter spreads.
H3a. Adverse selection costs and the probability of informed trading in the secondary market
are lower for more underpriced IPOs.
H4. IPOs with a more diffuse ownership structure have a more liquid secondary market.
1.2. The illiquidity-compensation hypothesis
In contrast with the Booth and Chuas theory, Ellul and Pagano (2006) demonstrate that initial
underpricing is an increasing function of the expected post-listing illiquidity due to
asymmetric information. They propose a model in which investors worry about the after-
market illiquidity that may result from asymmetric information after the IPO. The less liquid
the after-market is expected to be, and the less predictable its liquidity, the larger the IPO
underpricing, because IPO underpricing compensates uninformed investors who participates
in the issue not only for adverse selection costs borne at the IPO stage but also for the
expected trading costs that they will bear by liquidating their shares in the after-market. In
addition, Ellul and Pagano (2006) provide empirical evidence in support of their theory using

6
a sample of 337 IPOs undertaken between 1998 and 2000 at the LSE, either on the Main
Market or on AIM.
The illiquidity-compensation theory leads us to posit the following two hypotheses, which are
the alternative hypotheses of H2a and H3b.
H2b. More underpriced IPOs are characterised by a lower post-listing liquidity and larger
spreads in the aftermarket.
H3b. Adverse selection costs and the probability of informed trading in the secondary market
are higher for more underpriced IPOs.
1.3. Institutional settings
The above-mentioned hypotheses are tested on a sample of IPOs undertaken on Euronext
Paris between 1995 and 2004. During this period, Euronext Paris was organised in three
regulated market segments
1
: the Premier March (i.e. Main Market) designed for the listing of
large companies, the Second March (i.e. Parallel Market) that catered to middle and small
capitalisations, and the Nouveau March (i.e. New Market) for growth companies
2
.
For any new listing, the specificity of Euronext Paris primary market is to offer and handle a
panel of initial offering mechanisms
3
comprising a fixed-price offering procedure, a book-
building procedure denominated placement, and three auction mechanisms (direct admission,
minimum price offer, and open-price offer) in which Euronext is the auctioneer. Fixed-price
offer and open-price offerings can be associated with a placement. In fact, most book-built
issues are offered as a double stage issue whereby, in addition to the private book-building
process, a separate mechanism offers shares to the public. The simplest and most common
technique is to offer shares to the public at a fixed price which is equal to the equilibrium
price set during the book-building process. An alternative method is to organise an auction in
which individual investors can place limit orders. In this case, the issue price may differ for
each category of subscribers. To the best of our knowledge, the only exchange that is
Euronext Paris regulates, this price differential and requires that the issue price paid by


1
In 2005, Euronext Paris merged the Premier March and the Second March into a single segement, Euromist, and the
Nouveau March was closed and replaced by Alternext. For more institutional details, refer to Boutron et al. (2007)
2
For a detailed description of listing requirements on these segments, see Gajewski and Gresse (2006).
3
For a detailed description of these listing mechanisms, see Gajewski and Gresse (2006).

7
institutions in the book-building process should not be lower than the definitive public offer
price.
After the first listing, the Euronext secondary market is an order-driven electronic system.
Order book trading is continuous for most liquid securities. The trading session starts with an
opening and terminates with a closing batch auction. For less liquid securities, trading is
periodic with one or two batch auctions a day.
2. Sample, data and measures
2.1. Sample and data
This empirical study has been led by using data from three sources. First, we gathered and
analysed the prospectuses available in the AMF
4
database for the period 1995-2004, that is
231 French IPO prospectuses. The following information was retrieved from the
prospectuses: the IPO date and subscription price, the number of shares on sale in the IPO and
the number of shares outstanding after the IPO, the IPO allocation mechanism, and the
percentage of shares held by the managers before and after the IPO.
In a second stage, information regarding shareholding has been collected from DAFSA Liens.
We have collected the ownership structure before and after each IPO date for the whole
sample of firms. The post-IPO ownership structure available in DAFSA Liens is that observed
on the 31
st
of December following the primary listing.
Finally, we retrieved post-IPO closing prices from Datastream. They were found for 227
stocks out of the initial sample. Last, we extracted high-frequency data from Euronext CD-
Roms, which were available for 211 stocks.
2.2. Return and liquidity measures
For each stock of the sample, underpricing is measured as the return between the closing price
observed 5 days after the IPO and the IPO price, and adjusted for the SBF250 index return:
0
5
0
5
I
I
P
P
U =
(1),


4
Autorit des Marchs Financiers.

8
where
5
P is the closing price on the fifth day following the IPO,
0
P is the IPO price,
5
I is the
closing value of the SBF250 index on the fifth day following the IPO, and
5
I is the closing
value of the index on the day of the IPO. The IPO is underpriced (overpriced) when 0 U >
( 0 U < ).
Liquidity measures are estimated on an observation period that surrounds the date at which
we observe the post-listing ownership, that over 6 months starting on the 1
st
of October
following the IPO. For IPOs occurred five days prior to October 1 or later, we make the 6-
month period start five days after the IPO date. This 5-day gap is meant to eliminate the effect
of the abnormal trading activity generally observed in the first days following primary
listings. Among the 211 IPO stocks for which we extracted Euronext data, 98 were traded
continuously within the 6-month observation period. The remaining 113 stocks were traded in
batch auctions only (two per day).
For the whole sample, post-IPO liquidity is measured with:
- the average daily turnover (TURN), that is the average daily volume in percentage of the
number of shares sold in the IPO,
- and the Amihud (2002)s illiquidity ratio computed as follows:

=
=
T
t t
t
V
R
T
AMIH
1
000 , 1
1
(2),
where R
t
is the stock return measured in logarithm on closing prices at date t, V
t
is the trading
volume on date t, and T is the number of trading days in the observation period.
For the sub-sample of continuously-traded stocks, we compute duration-weighted average
quoted spreads,

=
=
K
k k
k k
k
K
k
k
mid
bid ask
d
d
QS
1
1
1

(3),
and average effective spreads,

=

=
N
n n
n n
mid
mid P
N
ES
1
1

(4),
where
k
bid ,
k
ask ,
k
mid and
k
d are respectively the best bid quote, the best ask quote, the
mid quote and the duration of the best quotes observed at the time of the k
th
quoted spread in
the observation period; K is the total number of quoted spreads observed for the stock in the

9
observation period; P
n
is the transaction price for the n
th
transaction in the observation period;
mid
n
is the mid-quote prevailing at the time of the n
th
trade; and N is the total number of trades
in the period.
2.3. Measures of information asymmetry
As for spreads, measures of information asymmetry are derived over six months of
continuous trading from the 1
st
of October following the IPO date until the 31
st
of March of
the next year. For firms listed after the 1
st
of October, the start of the observation period is
postponed to 5 days after the IPO date. We then estimate the magnitude of information
asymmetry with four methodologies: the alpha coefficient of the Huang and Stoll (1997)s 3-
way spread decomposition, denoted
hs
, the average 30-minute price impact denoted PI
30min
,
the alpha coefficient of Lin, Sanger, and Booth (1995) denoted
lsb
, and the PIN measure
denoted PIN.
The 3-way decomposition method of Huang and Stoll (1997) can be conducted using two
different GMM estimation procedures. The first one requires the estimation of four
parameters, s, , , and , the probability of a reversal in trade sign. The second one uses the
mid-quote variation instead of the transaction price variation, and the observed posted spread
that prevails at the time of a trade instead of the constant spread s, which reduces to three (,
, and ) the number of parameters to estimate. We utilise the second methodology as it
produces a higher frequency of convergence of the GMM iteration algorithm, and we bunch
trades la Huang and Stoll (1997) to correct biases in the estimation of and due to order-
splitting practices.
We also conduct the decomposition of the effective spread in a realized spread and a price
impact within a 30-mn interval in the manner of Bessembinder and Kaufman (1997)
approach. Price impacts at a 30-mn interval are calculated as follows:

=
+

=
N
n t
t t
mid
mid mid
T
PI
1
min 30
min 30
1

(5),
Then, the Lin, Sanger and Booths adverse selection components (LSB) are estimated as the
sensitivity
LSB
of mid price revisions to trade sizes with the following regression model for
each stock i:
( )
1 1 + +
+ =
t t t t lsb t t
e Q mid P mid mid (6),
where
t
Q is the sign of trade t.
Notations used:

10

n
mid is the mid price at the time of the n
th
spread quoted in the observation
period;
N is the number of spreads quoted for the stock over the considered period;

t
P is the trade price of the t
th
transaction;

t
mid is the mid price prevailing before the t
th
transaction in stock i;

min 30 + t
mid is the mid price prevailing 30 minutes after the t
th
transaction;
T is the total number of trades for the stock over the observation period.
Finally, we implement the PIN measure following Easley, Kiefer, OHara, and Paperman
(1996). The probability of observing B buys and S sells on a given day can be implemented as
follows:
( )( ) ( ) ( )
( ) ( )
( )
( )
( ) ( )
( )
( )
( )
( ) ( )
! !
1
! !
! !
1 , , , ,
B
B T
e
S
T
e
S
T
e
B
T
e
S
T
e
B
T
e S B L
T
S
T
S
T
B
T
S
T
B
T

+
+
+
+
=
+ +


(7),
where is the probability of an information event which is bad news with probability and
good news with probability 1-. The arrival rate of informed trade arrival is . is the rate of
uninformed buy and sell trade arrivals.
On T days which are independent by assumption, the likelihood of observing ( )
T
t t t
S B
1
,
=
Buys
and sells over T days, corresponds to the product of likelihoods:
( ) ( ) ( )( ) ( )
=
=
=

T
t
t t
T
t
t t
S B L S B L
1
1
, , , , , , , ,
(8),
In order to get the probability of informed trading (PIN), we maximise the likelihood defined
in equation (8):

2 +
= PIN
(9).

2.4. Measures of ownership structure
We estimate the ownership concentration by observing several variables of ownership
structure for the whole sample during the period 1995-2004. These variables have been
extracted from DAFSA Liens to measure ownership concentration after the IPO at the date of
the 31
st
of December just after the IPO. We extracted the percentage of shares held by the
managers (MAN). We measure the percentage of shares held by institutional investors (INST)
and the managers family (FAM). In order to estimate the ownership concentration, we

11
identified all the blockholders who possess at least 5 percent of the firm shares and computed
their total holding in percentage (BLOCK). We also calculated the Herfindhal index (HERF),
by summing squared shareholdings of the five largest shareholders:

=
=
5
1
2
i
i
s HERF
(10),
where
i
s is the part that belongs to the i
th
largest shareholder (i=1,,5).
3. Test design
The relationships between initial underpricing, ownership concentration and secondary
markets liquidity are analysed running a three-stage multivariate analysis that combines
logistic and OLS regressions in the Heckman style to avoid endogeneity biases. The same
methodology is used to test the links between information asymmetry, initial underpricing,
and ownership concentration. All tests are conducted on the whole sample first. Then, they
are repeated on the sub-sample of firms that went public by using a book-building procedure.
As a matter of fact, the discretion provided by the book-building mechanism in the share
allocation process may result in a more effective effect of IPO underpricing on ownership
structure and post-listing liquidity.
3.1. First-stage logistic regression: estimation of the probability of underpricing
In a first stage, the probability for an issue to be underpriced, denoted ( ) 0 U P > , is modelled
as a function of the IPO size
5
:
( )
1 1 0
~
0 + + = > SIZE a a U P
(11),
where SIZE is the logarithm of the issue size calculated as the number of shares on sale in the
IPO multiplied by the subscription price.


5
Others factors such as earnings, P/E ratio, book-to-market have been inserted in the model, but none of them has been
proved to influence the probability of underpricing.

12
3.2. Second-stage OLS regressions
3.2.1. Post-listing liquidity and initial underpricing
In a second stage, liquidity measures are regressed on the level of underpricing. For the whole
sample, the average daily turnover (TURN) and the Amihud illiquidity ratio (AMIH) are
regressed on the level of underpricing predicted in the first-stage model, after controlling for
volatility, market value, and price level:
( ) ( )
2 4 0 3 2 1 0
~
) 0 (

ln ln + > + + + + = U U P b P b MV b b b AMIH or TURN (12),

where is the daily closing return volatility over the six-month observation period, ln(MV)
is the logarithm of the firms market value at the IPO date, P
0
is the IPO price and
U ) 0 U ( P

> is the predicted value of the initial underpricing measured as the predicted
probability from model (9) multiplied by initial return measured over the first five days of
trading.
For the sub-sample of IPO stocks that were continuously traded during the observation period,
the relationship between spreads and initial underpricing is also tested. Control variables used
are volatility, trading volumes, and price level:
( ) ( )
3 4 0 3 2 1 0
~
) 0 (

ln ln + > + + + + = U U P c P c V c c c ES or QS (13),
where ln(V) is the logarithm of the average daily trading volume over the six-months period.
3.2.2. Ownership structure and initial underpricing
Measures of ownership structure (HERF, BLOCK and INST) are modelled as a function of the
IPO size, the family ownership, and the underpricing level predicted at the first stage:
4 3 2 1 0
~
) 0 (

, + > + + + = U U P d FAM d SIZE d d INST or BLOCK HERF (14),

where FAM is the percentage of shares retained by the managers family after the IPO.
3.3. Third-stage OLS regressions: liquidity and ownership structure
In the third stage, liquidity measures are regressed on ownership concentration measures and
institution holdings as predicted in the second-stage regressions (14). The same control
variables as in models (12) and (13) are used:
( ) ( ) ( )
5 4 0 3 2 1 0
~

ln ln + + + + + = NST I or LOCK B ERF H e P e MV e e e AMIH or TURN (15),

( ) ( ) ( )
6 4 0 3 2 1 0
~

ln ln + + + + + = NST I or LOCK B ERF H f P f V f f f ES or QS (16),

where ERF H

, LOCK B

, and NST I

are the predicted values of HERF, BLOCK and INST

from models (14).

13
3.4. Information asymmetry, initial underpricing, and ownership structure
For continuously traded stocks, the relationship between information asymmetry, initial
underpricing, and ownership concentration are tested with the same three-stage approach, the
first stage being the estimation of the probability of underpricing, ( ) 0 U P > , as in equation
(9).
In a second stage, measures of information asymmetry (
lsb
,
hs
, PI
30min
, and PIN) are
regressed on predicted underpricing after controlling for market size, price level, insider
shareholding, the market segment (traditional or new market), the industrial sector (new
technologies vs traditional industries and services):
( ) ( )
7 6 5 4 3 0 2 1 0
~
) 0 (

ln ln + > + + + + + + = U U P g NTIC g NM g MAN g P g MV g g IA (17),

with PIN or PI IA
hs lsb
, , ,
min 30
= . NM is a binary variable equal to 1 if the firm is listed in
the New Market, 0 otherwise, and NTIC is a binary variable set to 1 for new-technologies
firms.
In a third stage, measures of information asymmetry (
lsb
,
hs
, PI
30min
and PIN) are regressed
on the ownership variables as predicted in models (14), and the same control variables as in
equation (17) are used:
( ) ( )
9 6 5 4 3 0 2 1 0
~
)

( ln ln + + + + + + + = NST I or LOCK B ERF H i NTIC i NM i MAN i P i MV i i IA (18),

with IA being alternatively
lsb
,
hs
,
min 30
PI , or PIN .
4. Results
Table 1 reports general statistics on initial underpricing, liquidity, risk, and ownership
structure for the whole sample of IPO firms and the sample restricted to the book-built firms.
On average, firms are underpriced whether considering the whole sample or the restricted
sample. The average level of underpricing (18%) is not surprising, but a more striking feature
is that most firms are closely held by blockholders after the IPO. On average, more than 73%
of shares are retained by shareholders who own more than 5% of shares after the IPO.
Further, almost 56% of the shares are retained by the managers after the IPO.
Table 2 presents a matrix of correlations between IPO underpricing, measures of liquidity,
ownership variables, and information-asymmetry measures. If we stick to the results of table
2, we may observe that post-listing liquidity is correlated significantly and positively to IPO
underpricing whatever measure is considered, and that initial underpricing is negatively

14
associated with all measures of information asymmetry. However, IPO underpricing does not
appear to be correlated to ownership dispersion. With the exception of a weak correlation
between the Herfindhal index and turnover, shareholding variables are not significantly
correlated with measures of liquidity or information asymmetry.
Those relationships are then investigated through the multivariate analysis described at
Section 3. Table 3 displays the results on the relationship between initial underpricing and
after-market liquidity. The positive relationship between underpricing and turnover is still
positive in the second stage regressions and highly significant for both the whole sample and
the book-built sub-sample. The Amihud illiquidity ratio is negatively related to the predicted
underpricing, with a significance of 5% for the whole sample, but the negative coefficient is
not significantly different from zero for the book-built sub-sample. As for spread regressions,
the coefficients of the underpricing variable are always negative but never significantly
different from zero. Pearson correlations between spreads and underpricing are significantly
negative, yet when spreads are controlled for volumes, the effect disappears. This allows us to
conclude that underpricing promotes post-listing liquidity, but this effect mostly relates to the
volume-component of liquidity. Hypothesis H2b is thus rejected, but hypothesis H2a is only
partially validated.
This liquidity effect is not formed through the mediation of ownership structure, converse to
the findings of Pham et al. (2003) over an Australian sample. The first three lines of Table 4,
which report the estimations for the second-stage regressions of ownership variables on
underpricing, show that ownership dispersion and institutional holdings are unrelated to initial
underpricing, and this result is unchanged when the sample is reduced to book-built issues.
Therefore, as Hill (2006) for the UK, we reject hypothesis H1. The remainder of Table 4
displays the results for the third-stage regressions. It appears that neither the Amihud
illiquidity measure and nor spreads are significantly related to ownership variables. Further,
the coefficients of ERF H

and LOCK B

are significantly positive at the 5% and 1% threshold

respectively, in the turnover regressions for the whole sample. These findings allow us to
reject H4 and suggest that large shareholders or blockholders may be active traders in the year
following the IPO. Conversely, the link between turnover and institutional holdings is
significantly negative, suggesting that institutions behave more as long-term investors and
remain passive in the post-listing year. Results for the book-buildings sub-sample, not
reported for sake of brevity, do not change our conclusions. Over this sub-sample, no
relationship between liquidity and ownership structure is found to be significant, except the

15
negative link between institutional holdings and turnover with a statistical significance of
10%.
The estimations for the regressions involving asymmetric information measures are displayed
in Tables 5 and 6. As shown in Table 5, all measures negatively relate to initial underpricing
whether the whole sample or the book-built sub-sample is considered, with a minimum
statistical significance of 5% except for Huang and Stolls alphas. Once again, the
relationship is not obtained through the mediation of ownership structure, as none of our
measures of information asymmetry is significantly influenced by ownership variables (cf.
Table 6). Therefore, we fail to reject H3a, but reject H3b.
We conclude from our sample that more underpriced French IPO stocks are more intensively
traded in the post-listing period and that they are characterised by lower adverse selection
costs and informed trading. Besides, we do not notice any important difference between book-
built and non book-built IPOs. These effects are due neither to ownership dispersion nor to
institutions participation in the issue, but are probably assignable to the interest high after-
market returns generate.
5. Conclusion
Over a sample of Euronext IPOs between 1995 and 2004, we partially validate the liquidity-
promotion theory, but reject the illiquidity-compensation hypothesis. According to our
findings, the liquidity effect generated by initial underpricing mainly arises through trading
volumes. Adverse selection costs are lower for more underpriced IPO stocks, which suggests
that that more public information is produced for these stocks. We fail to prove that these
effects are stronger for book-built issues and that they result from a more diffuse ownership
obtained by underpricing the issue. We rather assign them to investors and medias interest in
IPOs that perform better in the immediate after-market.

16
References
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Financial Economics, 17(2), 223-249.
Booth J .R. and L. Chua, 1996, Ownership Dispersion, Costly Information and IPO Under-
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Brennan M. J . and A. Subrahmanyam, 1996, Market Microstructure and Asset Pricing: On
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Corwin S. A., J . H. Harris and M. L. Lipson, 2004, The Development of Secondary Market
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Ellul A. and M. Pagano, 2006, IPO Underpricing and After-Market Liquidity, Review of
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Hahn T. and J . A. Ligon, 2004, Liquidity and Initial Public Offering Underpricing,
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Hill P., 2006, Ownership Structure and IPO Underpricing, Journal of Business Finance and
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Maksimovic and W. T. Ziemba (eds.), Handbooks in Operations Research and
Management Science: Finance, 9, North-Holland, Amsterdam, 993-1016.

17
Li M., T. H. McInish and U. Wongchoti, 2005, Asymmetric Information in the IPO
Aftermarket, The Financial Review, 40(2), 131-153.
Li M., S. X. Zheng and M. V. Melancon, 2005, Underpricing, Share Retention, and the IPO
Aftermarket Liquidity, International Journal of Managerial Finance, 1(2), 76-94.
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the Table in IPOs?, Review of Financial Studies, 15(2), 413-443.
Maug E., 1998, Large Shareholders as Monitors: Is There a Trade-off between Liquidity and
Control?, Journal of Finance, 53(1), 65-98.
Michaely R. and W. H. Shaw, 1994, The pricing of Initial Public Offerings : Tests of the
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Public Offerings, Journal of Financial Economics, 35(2), 199-219.

18
Table 1. Descriptive statistics on sample firms
All IPOs Book-built IPOs only
Variable # Obs Mean Standard-deviation # Obs Mean Standard-deviation
AGE 231 12.88 12.21 166 12.01 11.57
P
0
231 22.10 11.99 166 20.79 12.15
SIZE 231 19,273,387 35,298,141 166 24,572,077 40,345,346
U

231 18.10% 35.32% 166 17.82% 34.04%
V 211 430,345 779,967 159 473,988 854,351
TURN 211 0.5862% 0.5028% 159 0.6038% 0.5263%
211 3.9315% 1.9443% 159 4.2665% 2.0341%
QS 97 2.4289% 1.1532% 84 2.5468% 1.1853%
ES 97 2.1992% 0.9553% 84 2.2978% 0.9789%
BLOCK 226 0.7311 0.1542 163 0.6981 0.1525
INST 226 0.0950 0.1593 163 0.1156 0.1700
MAN 225 0.5570 0.2913 162 0.4990 0.2781
HERF 225 0.3407 0.2180 163 0.2943 0.1974
Note: AGE is the age of the firmat the time of the IPO. P
0
is the IPO price. SIZE corresponds to the issue size equal to the number of shares on sale times the IPO
price. For each stock of the sample, IPO underpricing is measured as the adjusted return (U) observed over the first five trading days. All trading measures are
estimated over the six months surrounding the 31
st
of Dember that follows the IPO date. V is the average trading volume in over this post-listing period. TURN is
the average daily turnover, that is the average daily volume in percentage of the number of shares sold in the IPO. is the closing return volatility. We compute
duration-weighted average quoted and effective spreads (QS and ES). BLOCK is the percentage of shares controlled by the blockholders. INST is the percentage of
shares controlled by institutional investors. MAN is the percentage of shares retained by the managers. HERF is the Herfindhal index of ownership concentration. All
ownership variablesz are measured after the IPO (at the end of the year following the IPO).

19
Table 2. Matrix of correlations between IPO underpricing, liquidity and information asymmetry
Underpricing Measures of liquidity Ownership structure Measures of information asymmetry
U

TURN AMIH
QS ES HERF BLOCK INST
lsb

hs
PIN PI
30min

U

1 0.33884
***

(<.0001)
223
-0.12139
*

(0.0837)
204
-0.31697
***

(0.0019)
94
-0.27785
***

(0.0067)
94
-0.02176
(0.7466)
223
0.03215
(0.6330)
223
-0.01388
(0.8366)
223
-0.13186
(0.2027)
95
-0.25670
(0.1493)
33
-0.22923
**

(0.0255)
95
-0.28659
***

(0.0059)
91
TURN
1 -0.21037
***

(0.0025)
204
-0.53478
***

(<.0001)
94
-0.50174
***

(<.0001)
94
-0.13267
*

(0.0585)
204
-0.08561
(0.2234)
204
-0.06318
(0.3693)
204
-0.01668
(0.872)
95
-0.18483
(0.3031)
33
-0.10280
(0.3215)
95
-0.29360
***

(0.0047)
91
AMIH
1 0.57052
***

(<.0001)
94
0.54879
***

(<.0001)
94
0.08150
(0.2465)
204
0.02757
(0.6955)
204
-0.08113
(0.2487)
204
0.01457
(0.8885)
95
0.73825
***

(<.0001)
33
0.03684
(0.7230)
95
0.46110
***

(<.0001)
91
QS
1 0.97023
***

(<.0001)
94
0.09383
(0.3684)
94
0.01969
(0.8506)
94
0.09284
(0.3735)
94
0.20608
**

(0.0463)
94
0.09974
(0.5870)
32
0.10962
(0.2929)
94
0.8279
***

(<.0001)
91
ES
1 0.09278
(0.3738)
94
0.01749
(0.8671)
94
0.06672
(0.5229)
94
0.16195
(0.1189)
94
0.11398
(0.5345)
32
0.08046
(0.4408)
94
0.81310
***

(<.0001)
91
HERF
1 0.63888
***

(<.0001)
223
-0.3950
***

(<.0001)
223
0.0422
(0.6846)
95
0.6846
(0.962)
33
0.12515
(0.2269)
95
0.02160
(0.8389)
91
BLOCK
1 -0.30388
***

(<.0001)
223
0.13754
(0.1838)
95
0.04867
(0.7879)
33
0.07936
(0.4446)
95
-0.01655
(0.8763)
91
INST
1 0.00656
(0.9497)
95
0.05207
(0.7735)
33
-0.05248
(0.6135)
95
0.11150
(0.2927)
91
lsb

1 0.27433
(0.1224)
33
-0.01746
(0.8666)
95
0.49255
***

(<.0001)
91
hs

1 -0.17346
(0.3344)
33
0.27340
(0.1300)
32
PIN

1 0.02792
(0.7928)
91
PI
30min

1

20
Note: For each stock of the sample, IPO underpricing is measured as the adjusted return (U) observed over the first five trading days. Liquidity measures and measures of information asymmetry
are estimated over a six-month period surrounding the 31
st
of December that follows the IPO date. The average daily turnover (TURN), that is the average daily volume in percentage of the
number of shares sold in the IPO, and the Amihud illiquidity ration (AMIH) are calculated for every stock. Duration-weighted average quoted spreads (QS) and average effective spreads (ES) are
computed for continuously traded stocks. HERF is the herfindhal index of ownership concentration. BLOCK is the percentage of shares controlled by the blockholders. INST is the percentage of
shares controlled by institutional investors. All ownership measures are measured after the IPO (at the end of the year following the IPO).
lsb
,
hs
, PIN and PI
30min
denotes the Lin, Sanger, and
Booths alpha coefficient, the Huang and Stolls alpha coefficient, the average 30-minute price impact, and the PIN measure respectively. They are estimated for continuously traded stocks only.
***,**,* indicate that the coefficient is significantly positive or negative respectively at the 1%, 5%, 10% level. P-values are reported in brackets.

21
Table 3. IPO underpricing and after-market liquidity

( ) 0 U P >

All IPOs Book-built
IPOs only


TURN AMIH QS ES TURN AMIH QS ES
Number of
observations
231 211 211 97 97 159 159 84 84
Regression type Logit OLS OLS OLS OLS OLS OLS OLS OLS
intercept 3.0153** -0.0130** 11.9113*** 9.5095*** 8.1335 -0.0131** 10.9980*** 9.5933*** 8.2181***

(0.0318) (0.0181) (0.0001) (<.0001) (<.0001) (0.0343) (0.0024) (<.0001) (<.0001)
SIZE -0.1520*

(0.0788)
0.0014*** 0.0389 0.1539*** 0.1429 0.0017*** 0.0202 0.1909*** 0.1702***

(<.0001) (0.6412) (0.0005) (<.0001) (<.0001) (0.8297) (0.0003) (<.0001)
lnMV 3.8862.10
-4
-0.5236*** 3.1917.10
-4
-0.4671**

(0.1912) (0.0018) (0.3298) (0.0151)
lnV -0.6576*** -0.5668 -0.7121*** -0.6076***

(<.0001) (<.0001) (<.0001) (<.0001)
ln
0
P
0.0019*** -0.6271** 0.2021 0.2111 0.0020 -0.6567* 0.3590* 0.3179*

(0.0009) (0.0496) (0.2597) (0.1513) (0.0019) (0.0793) (0.0863) (0.0622)
( ) U 0 U P

>
5.362.10
-5
*** -0.0135** -0.0026 -6.4719.10
-4
4.049.10
-5
*** -0.0112 -0.0035 -0.0010

(<.0001) (0.0448) (0.3302) (0.7659) (0.0035) (0.1618) (0.2507) (0.6781)
Cox-Snell R 1.34%
Adjusted R 37.67% 6.82% 64.64% 66.46% 45.76% 4.94% 63.93% 65.03%
Note: The second column of the table reports the results of the first stage Logit regression in which the dependent variable is a dummy equal to 1 if the issue is underpriced, 0
otherwise. The probability of an issue to be underpriced is modelled as a function of SIZE, the logarithm of the issue proceeds in million euros. The rest of the table reports the
results of the 2-stage least square regressions of liquidity measures onto the initial underpricing predicted in the Heckman style, i.e. calculated as ( ) 0

> U P , the predicted

probability of being underpriced, multiplied by U, the actual level of underpricing. Liquidity variables are measured on a six-month observation period surrounding the 31
st
of
December that follows the IPO date. The average daily turnover (TURN), i.e. the average daily volume in percentage of the number of shares sold in the IPO, and the Amihud
illiquidity ratio (AMIH) are calculated for all stocks. The duration-weighted average quoted (QS) and the average effective spread (ES) are computed for continuously traded
stocks. is the closing return volatility over the six-month observation period. lnMV is the market value in logarithm. lnV represents the logarithm of the average daily trading
volume in euros. P
0
is the IPO price. P-values are in parentheses.
*
,
**
,
***
denote significance at 10, 5 and 1% levels respectively.

22
Table 4. Ownership structure and after-market liquidity
Intercept SIZE FAM ( ) U 0 U P

> lnMV lnV

ln
0
P
ERF H

LOCK B

NST I

# obs. Adj. R
HERF 1.2320*** -0.0594*** 0.2572*** -6.3214.10
-4
224 29.47%
(<.0001) (<.0001) (<.0001) (0.2026)
BLOCK 1.1893*** -0.0315*** 0.1748*** 8.922.10
-5
224 23.64%
(<.0001) (0.0010) (<.0001) (0.8070)
INST -0.5088*** 0.0394*** -0.1130*** 9.962.10
-5
224 13.96%
(0.0031) (0.0002) (<.0001) (0.8241)
TURN -0.0203*** 0.0016*** 6.2276.10
-4
* 0.0022*** 0.0065** 206 33.16%
(0.0038) (<.0001) (0.0722) (0.0003) (0.0268)
TURN -0.0263*** 0.0016*** 6.0947.10
-4
* 0.0022*** 0.0115*** 206 33.82%
(0.0011) (<.0001) (0.0674) (0.0003) (0.0086)
TURN -0.0209*** 0.0017*** 8.7176.10
-4
** 0.0022*** -0.0166*** 206 33.98%
(0.0018) (<.0001) (0.0209) (0.0003) (0.0065)
AMIH 10.8218*** 0.0225 -0.4682** -0.7050** 0.6684 206 5.39%
(0.0045) (0.7979) (0.0135) (0.0322) (0.6727)
AMIH 11.2934** 0.0149 -0.4936*** -0.7098** 0.3378 206 5.31%
(0.0102) (0.8648) (0.0072) (0.0311) (0.8875)
AMIH 11.0549 0.0207 -0.4613 -0.7072 -1.1837 206 5.36%
(0.0026) (0.8141) (0.0258) (0.0316) (0.7217)
QS 9.7481*** 0.1455*** -0.6757*** 0.2066 -0.1008 96 64.54%
(<.0001) (0.0012) (<.0001) (0.2592) (0.8779)
QS 9.8626*** 0.1452*** -0.6755*** 0.2059 -0.2031 96 64.55%
(<.0001) (0.0013) (<.0001) (0.2609) (0.8394)
QS 9.6875*** 0.1447*** -0.6774*** 0.2075 0.4145 96 64.57%
(<.0001) (0.0012) (<.0001) (0.2568) (0.7417)
ES 8.2036*** 0.1385*** -0.5715*** 0.2085 -0.0025 96 66.66%
(<.0001) (0.0002) (<.0001) (0.1571) (0.9963)
ES 8.2047 0.1385 -0.5714 0.2085 -0.0029 96 66.66%
(<.0001) (0.0002) (<.0001) (0.1573) (0.9971)
ES 8.2009*** 0.1381*** -0.5720*** 0.2086 0.0729 96 66.66%
(<.0001) (0.0001) (<.0001) (0.1569) (0.9425)

23
Note: The first three lines of the table report the estimations for the second-stage lest square regressions of ownership variables on underprincing. The remainder of the table displays the results of the third-stage
regressions of liquidity measures onto ownership variables. HERF is the Herfindhal index of ownership concentration. BLOCK is the percentage of shares controlled by the blockholders. INST is the percentage of
shares controlled by institutional investors. All ownership measures are measured after the IPO (at the end of the year following the IPO). Liquidity measures are computed over a six-month period surrounding the
end of the IPO year. Liquidity is measured by the average daily turnover (TURN) and the Amihud illiquidity ratio (AMIH) for all stocks. Duration-weighted average quoted spreads (QS) and average effective
spreads (ES) are calculated for continuously traded stocks. ERF H

, LOCK B

, and NST I

are the respective value of HERF, BLOCK, and INST as predicted by the second-stage models. is the closing return
volatility over the six-month observation period. lnMV is the market value in logarithm. lnV represents the logarithm of the average daily trading volume in euros. P
0
is the IPO price. P-values are in parentheses.
*
,
**
,
***
denote significance at 10, 5 and 1% levels respectively.


24
Table 5. After-market information asymmetry and underpricing
All IPOs Book-built IPOS only

lsb

hs
PI
30min
PIN
lsb

hs
PI
30min
PIN
0.6111*** -0.1432 1.5610*** 0.7397** 0.5407*** -0.0346 1.6393** 0.3439
intercept
(<.0001) (0.7840) (0.054) (0.0100) (0.0001) (0.9546) (0.0261) (0.2477)
-0.0228*** 0.0236 -0.0336 -0.0213 -0.0158** 0.0247 -0.0317 -0.0001
lnMV
(0.0014) (0.3954) (0.3134) (0.1509) (0.0269) (0.4408) (0.4153) (0.9941)
0.00189 -0.0504 -0.1447** -0.0147 -0.0172 -0.0908* -0.1788*** -0.0163
ln
0
P
(0.8701) (0.2729) (0.0135) (0.5488) (0.1369) (0.0978) (0.0080) (0.5251)
-0.0096 0.0701 -0.0491 0.0517 -0.0130 0.0279 -0.0553 0.0529
MAN
(0.5822) (0.2494) (0.5552) (0.1634) (0.4516) (0.6943) (0.5583) (0.1742)
-0.0095 0.0107 -0.0015 -0.0013 -0.0202 0.0051 -0.0185 6.568.10
-5

NM
(0.4744) (0.8502) (0.9812) (0.9623) (0.1079) (0.9334) (0.7924) (0.9981)
0.0346*** -0.0867* 0.1380** -0.0394 0.0361*** -0.0995* 0.1243* -0.0257
NTIC
(0.0047) (0.0690) (0.0197) (0.1229) (0.0020) (0.0932) (0.0511) (0.3111)
-3.8412.10
-4
** -3.4537.10
-4
-0.0027*** -9.3203.10
-4
** -3.7802.10
-4
** 2.2623.10
-4
-0.0025** -9.9402.10
-4
**
( ) U 0 U P

>
(0.0444) (0.6687) (0.0036) (0.0219) (0.0401) (0.8670) (0.0126) (0.0164)
Number of
observations
95 33 95 95 82 28 82 82
Adjusted R 13.15% 4.60% 21.73 7.65% 16.86% 4.49% 20.95% 6.26%
Note: This table displays the estimations for the second-stage regressions of information asymmetry measures on initial underpricing. Dependant variables are the alpha coefficient
of Lin, Sanger, and Booth (1995), the alpha coefficient of Huang and Stoll (1997), the average 30-minute price impact, and the PIN measure, denoted
lsb
,
hs
, PI
30min
, and PIN
respectively. The dependent variable ( ) U U P > 0

is the probability for an issue to be underpriced as predicted in the first-stage logit regression multiplied by the actual level of
underpricing. Control variables comprise the market value in logarithm (lnMV), the IPO price in logarithm (lnP
0
), the managers holdings after the IPO (MAN), a binary variable
equal to 1 for New Market issues (NM), a binary variable equal to 1 for new technologies firms (NTIC). ***,**,* indicate that the coefficient is significantly positive or negative
respectively at the 1%, 5%, 10% level. P-values are reported in brackets.

25

Table 6. After-market information asymmetry and ownership structure
All IPOs Book-built IPOs only


lsb

hs
PI
30min
PIN
lsb

hs
PI
30min
PIN
Number of
observations
95 33 95 95 82 28 82 82
ERF H

coefficient -0.0406 -0.0570 0.0931 -0.0661 -0.0435 -0.3032 -0.0977 0.1978

P-value 0.5160 0.7781 0.7240 0.6210 0.5375 0.3182 0.7596 0.2137

Adj. R 9.48% 4.21% 22.15% 2.22% 12.47% 8.89% 29.59% 0.81%
LOCK B

coefficient -0.1016 -0.1257 -0.1217 -0.1516 -0.1258 -0.4920 -0.0829 0.1664

P-value 0.2794 0.6713 0.7952 0.4508 0.2287 0.2692 0.8898 0.4828

Adj. R 10.25% 4.59% 13.46% 2.58% 13.72% 9.89% 13.67% 0.60%
NST I

coefficient 0.0846 0.0403 -0.0244 0.2729 0.1162 0.3407 -0.0468 -0.1802

P-value 0.5141 0.9217 0.9697 0.3236 0.3406 0.5186 0.9463 0.5140

Adj. R 9.48% 3.95% 13.39% 3.03% 13.09% 6.28% 13.65% -0.69%
Note: This table reports the results of third-stage regressions, in which measures of information asymmetry (
lsb
,
lsb
, PI
30min

and PIN) are regressed on the predicted values of the ownership variables ERF H

, LOCK B

, and NST I

alternatively. For
each regression, the table provides the coefficient of the ownership variable used, the P-value associated, and the adjusted R
of the regression. Control variables included in the regressions comprise market value, price level, insiders holdings, market
segment (traditional or new market), and industrial sector (new technologies vs traditional industries and services). ***,**,*
indicate that the coefficient is significantly positive or negative respectively at the 1%, 5%, 10% level.