The Influence of Overallotment Options and Price Stabilisation in the IPO Aftermarket

Sammanfattning: Underwriters are normally granted an overallotment option by issuers in conjunction with initial public offerings (IPOs). Prior research has established that its main purpose is to enable underwriters to engage in price stabilisation activities in the aftermarket of an IPO. Moreover, past studies agree that the overallotment option incurs a substantial incremental cost to the issuer, while there is no consensus as to whether price stabilisation has an impact on new listings. In this study, we assess the impact of price stabilisation on the width of the bid-ask spread in the immediate aftermarket for 73 Swedish initial public offerings between 2010 and 2019. We find that stabilised companies experience on average an 11 percent decrease in the width of the bid-ask spread, but that this effect is limited only to the first days of trading. While this implies that stabilisation can affect a new equity offering, we leave it to future research to further explore whether the overallotment option is worth the costs it entails for the issuer.