Abstract

The underpricing of initial public offerings (IPOs) is generally explained with asymmetric information and risk. Beyond Ellul and Pagano (2006), who build upon liquidity risk and effective spread (as liquidity proxy), this paper introduces a new liquidity based explanation: assimilating an IPO to a large sell-initiated block trade, I suggest to look at the underpricing as the price for the liquidity «bought» by the seller. Then, this price should be lower (higher) for more (il)liquid stocks. The framework is supported by empirical results for a sample of Italian IPOs between 2001 and 2005, where underpricing is negatively related with several liquidity measures.