The Effect of the Trading System on IPO Underpricing: Evidence from the 1997 Order Handling Rules
This study uses 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 IPO underpricing. We find that the increase in liquidity that the OHR represent led to a decrease in underpricing for cold IPOs suggesting that the expected cost of underwriter price support is a factor in the level of IPO underpricing for cold IPOs, at least on markets where the lead underwriter and principal secondary market maker are usually the same entity.