Ch. 6: Security Offerings 291
nouncements (by about an hour) and attribute it the differences in the organizational
structure of the NYSE/Amex and Nasdaq market places. They find evidence consistent
with NYSE/Amex limit order books and market opening mechanisms slowing price re-
actions to news. They also report a large number of trading halts (21%) on the NYSE
around daytime SEO announcements, while there are very few on Nasdaq.
Stock offers can also cause temporary biases in daily stock returns by disrupting
normal buy-sell order flow in the secondary market.Lease, Masulis, and Page (1991)
document that around the public offer dates of SEOs stock returns are biased downward
due to the loss of purchase orders to the temporary primary market in the stock. One
result is that stock transaction prices tend to occur at the lower ask quote, rather than
at the midpoint of the bid and ask, which generates an apparent fall in the stock price.
There is also evidence that market makers may lower their quotes in this period due to
a positive imbalance in their inventory position resulting from the predominance of sell
orders at this time. Lease, Masulis and Page find that using the closing bid–ask average
rather than the closing transaction prices eliminates the statistical significance of the
drop and reduces by more than half the average negative offer date return.
Several more recent studies explore the impacts of market microstructure on securi-
ties issuance. Presumably, as lead underwriter they have better knowledge of potential
buyers and sellers, which should give them a competitive advantage in market making
immediately after the IPOs, especially for larger orders.Ellis, Michaely, and O’Hara
(2000, 2004)report that the typical lead underwriter is highly active as a market maker
immediately following the IPO, but that this role diminishes over the following year.
Corwin, Harris, and Lipson (2004)examine IPOs listed on the NYSE and report that
initial buy-side liquidity is higher for IPOs with high quality underwriters, large syn-
dicates, low insider sales and high pre-market demand (offer is priced at or above the
maximum filing range price), while sell-side liquidity is higher for IPOs that represent
a large fraction of outstanding shares and have low pre-market demand (offer is priced
at or below the minimum filing range price). Limit order trading is very weak on the
first day of trading, though there is an unusual number of limit buy orders submitted at
the offer price for cold IPOs, which are likely to be underwriter stabilization bids. They
also report that pre-opening order flow is a good predictor of first day prices and are
reflected in the opening price set by the specialist.Field, Cao, and Hanka (2004)study
the effects of lock-up expirations on IPO stocks and find that substantial increases in
insider trading by officers and directors in almost 25 percent of cases do not adversely
affect stock liquidity. They find only a 3 percent increase in effective bid–ask spreads
that lasts only about one week, while depth and trading activity substantially improve.
Mola and Loughran (2004)studies the effects of market microstructure factors on
SEO underpricing, along with the effects of underwriter competition. They find that the
offer price discount is positively related to relative offer price, a tech indicator, gross
spread and a top tier analyst indicator and negatively related to a utility indicator, log of
share price, a high underwriter reputation indicator and an integer offer price indicator.
Mola and Loughran conclude that changing issuer composition toward smaller, riskier
Nasdaq listed issuers and increasing underwriter market power measured in terms of