Impact of liquidity and information on the mispricing of newly public firms

Abstract

We test whether the mispricing of newly public firms is affected by liquidity and information during the quiet period, from the end of the quiet period until the lock-up expiration date, and post lock-up. Liquidity is affected by the underwriter’s stabilization efforts during the quiet period and the founder’s ability to sell shares in the post-lockup period. Based on a sample of winner and loser events for more than 2,600 newly public firms during 1992–2001, the degree of under-or overreaction is conditioned on the period within the aftermarket following the IPO. We attribute the results to different liquidity and information effects among the three periods.