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The cost of fragmentation: lessons from initial public offerings

Author

Listed:
  • Moez Bennouri

    (Groupe Sup de Co Montpellier (GSCM) - Montpellier Business School)

  • Sonia Falconieri

    (Sir John Cass Business School)

  • Daniel Weaver

    (Rutgers - Rutgers University System)

Abstract

This paper investigates both theoretically and empirically the impact of market structure on the price discovery process at the opening of trading of IPOs. Some papers suggest that IPO value uncertainty is not fully resolved at the offering but continues into the aftermarket. Our model predicts that this ex-post uncertainty, i.e. the residual uncertainty about the firm value in the aftermarket, is related to the level of fragmentation in the aftermarket. Our model further predicts that consolidated markets are more efficient in resolving ex-post uncertainty than fragmented markets. Using the introduction of the opening IPO Cross on Nasdaq as a natural experiment, our empirical analysis provides compelling evidence that IPOs in fragmented markets exhibit larger levels of ex-post uncertainty and, consequently, larger underpricing than in consolidated markets.

Suggested Citation

  • Moez Bennouri & Sonia Falconieri & Daniel Weaver, 2023. "The cost of fragmentation: lessons from initial public offerings," Post-Print hal-04756086, HAL.
    • Handle: RePEc:hal:journl:hal-04756086
    DOI: 10.1080/1351847X.2023.2206972
    Note: View the original document on HAL open archive server: https://hal.science/hal-04756086v1
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    References listed on IDEAS

    as
    1. Chen, Zhaohui & Wilhelm Jr., William J., 2008. "A theory of the transition to secondary market trading of IPOs," Journal of Financial Economics, Elsevier, vol. 90(3), pages 219-236, December.
    2. Jenkinson, Tim & Ljungqvist, Alexander, 2001. "Going Public: The Theory and Evidence on How Companies Raise Equity Finance," OUP Catalogue, Oxford University Press, edition 2, number 9780198295990.
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