The IPO When-Issued Market

Abstract

We examine the IPO when-issued/conditional market of the London Stock Exchange which has a regulatory setting that is very different from that of other developed markets. Our results show that the decision to have a when-issued market affects the setting of the offer price. For companies that have a conditional trading the actual offer price is £3.4 but would have been £2.03 had these firms not had a when-issued market. So, investors actually pay a ‘rent’, through a higher offer price, in order to acquire shares of companies that will be traded in the when-issued market. In addition, companies that are larger, less risky, with higher future growth opportunities and underwritten by more reputable underwriters are more likely to have a when-issued market. Furthermore, the when issued market appears to be highly informative for investors and affects the volume in the first day of trading.