Abstract
The positive relation between initial underpricing and liquidity in the secondary market several months after the initial public offering has been previously attributed to ownership dispersion induced by underpricing. We show that public information production can be another channel by which underpricing improves liquidity. Using a sample of IPOs undertaken on Euronext, we show that the analyst coverage engendered by initial underpricing reduces information asymmetry costs and illiquidity in the secondary market. Regarding information asymmetry, the impact is statistically more significant on measures based on adverse selection costs than on measures based on the proportion of informed traders in the market.
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