Essays in market microstructure of NYSE-listed IPOs.

In essay 1, we investigate the effect of decimalization on the aftermarket trading of NYSE-listed IPOs. We find that after decimalization, the relation between spreads and underpricing becomes negative, suggesting that benefits from the increased price competition accrue more to hot IPOs. The depths are generally smaller postdecimalization because of the higher probability of front-running that aggravates the costs of adverse selection and limit order submission. In addition, we show that underwriters still provide price support but are only willing to cover the initial short position if it is still profitable post-decimalization. We also find that decimal pricing does not change the flipping strategy of institutions for cold IPOs as flipping is likely bound by underwriter price support and shares allocation. Institutions, however, tend to flip more hot IPOs in the postrather than pre-decimalization period, suggesting that the cost of flipping is much lower for those share prices with a substantial run-up during aftermarket trading. Essay 2 investigates the effect of decimalization on quote revision (both depth and spread) behavior of NYSE-listed IPO stocks. We find that specialists revise their quoted depth more frequently than quoted spread in both the preand post-decimalization periods. The proportion of spread revisions among cold and warm IPOs, however, increases after decimalization, suggesting that decimalization helps to reduce the binding constraint on spreads of cold and warm IPOs. But there is no change in the proportion of spread revisions in hot IPOs. In the post-decimalization period, the proportion of bid depth increases is higher, which implies that specialists tend to improve their bids with a smaller increment in depth, compared to the pre-decimalization period. We also show that specialists are more likely to revise quotes that result in a change in spread for highpriced, high-volatility and/or less reputable underwriters IPOs, and to revise quotes that result in a change in depth for IPOs with smaller underpricing and/or higher risk. In essay 3, we examine the effects of decimalization on returns, volatility, and limit order executions of the NYSE-listed IPOs. We find that the opening price captures almost all the initial return in preand post-decimalization periods. However, the initial and intraday returns of hot IPOs are smaller in post-decimalization period. The results reveal that there is no profit opportunity for day-traders who buy and sell shares of newly listed issues during the first trading day, and the higher front-running probability explains the lower returns of hot IPOs in post-decimalization period. The volatility is higher at the start of trading, suggesting the information-driven trade is greater during this period, and it stabilizes throughout the rest of the day. The intraday volatility is significantly lower for hot and warm IPOs, especially at the start of trading, throughout the day in postdecimalization period, suggesting that the information flows changed after decimalization. The proportion of limit order executions is lower after decimalization due to the lower displayed liquidity and the lower cost of submitting market orders. The proportion of limit order executions at the start of trading is higher in preand post-decimalization, and stabilizes quickly. In post-decimalization, the proportions of limit order executions for hot and warm IPOs are lower at the start of trading, but cold IPOs do not exhibit the same. These results suggest that the execution rate of limit orders depends on underpricing. u ATTENTION: The Singapore Copyright Act applies to the use of this document. Nanyang Technological University Library