And frequently the underwriter will buy some of the shares to prop up the price and attract investors during the first few days of trading. While this practice is often regarded as a way to ensure the liquidity of new issues, little is known about what types of IPOs get bolstered and whether it really affects liquidity. Until recently the data has not been available to fully answer these questions. Now there is evidence, analyzed by GSB Assistant Professor of Finance Manju Puri and N. R. Prabhala of the Yale School of Management, showing that supported IPOs are typically larger, have lower underwriter commissions, offer higher prices than unsupported stocks, and are not likely to be underwritten by lesser-known investment banks. It's the big issues.
Price support seems to have a role in helping after-market liquidity.
Yet until now there has been little proof that liquidity justifies price support. The researchers also debunk some common criticisms, based mostly on anecdotal evidence. One is that price support is a manipulative practice aimed at creating artificially high IPO prices. Another suggests that banks sometimes support stocks to help favored customers out of bad issues. If a stock price flags, the bank buys back the issue.