Underpricing, ownership dispersion, and aftermarket liquidity of IPO stocks

Booth and Chua [Booth J., Chua L. Ownership dispersion, costly information, and IPO underpricing. Journal of Financial Economics 1996; 41; 291-310] hypothesize that IPOs are underpriced to promote ownership dispersion, which in turn increases aftermarket liquidity of IPO stocks. We examine a sample of 1179 Nasdaq IPOs and find that underpricing is positively correlated with the number of non-block institutional shareholders after IPO but negatively correlated with the changes in the total number of shareholders. Firms with many non-block institutional shareholders tend to have high liquidity in the secondary market. These results provide support to Booth and Chua's hypothesis. Underpricing also has direct effects on secondary market liquidity after controlling for ownership structure and other factors.