How Does Underwriter Price Support Affect IPOs? Empirical Evidence

It is extensively documented that underwriters often ” stabilize” or ” support ” initial offerings (IPOs). However, little is known about the types of IPOs that are supported, and more broadly, how price support impacts the IPO process. We provide some of the first empirical evidence on the cross-sectional characteristics of supported IPOs, using a unique dataset of SEC filing supplemented with additional public data on IPOs. We document that IPOs that are supported are typically larger, have lower gross spreads and higher offer prices, and are unlikely to be underwritten by less prestigious underwriters. These findings are consistent with a liquidity-based explanation for why underwriters engage in price support. We also explore and reject other common explanations for price support, including a favored customer hypothesis and an underwriter reimbursement hypothesis.