Market-Making in Initial Public Offerings of Common Stocks: An Empirical Analysis

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Abstract
In this paper, we examine the behavior of the bid-ask spreads of initial public offerings of common stocks (IPOs) in the over-the-counter market. We find that, in the initial aftermarket, the quoted percentage bid-ask spreads for IPOs are, on average, about three-fourths as large as those for seasoned stocks. A cross-sectional and time-series simultaneous equations analysis indicates that significant differences in the IPO and seasoned spreads persist for eight weeks in the aftermarket. Further, we find that the lower IPO spreads stem from their differential elasticities with respect to the determinants of bid-ask spreads and volume as well as from significant differences in the levels of these determinants.

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