The Behavior of Prices, Trades and Spreads for Canadian IPO’s

Microstructure effects for 359 TSX listed IPO’s in the period 1984-2002 are examined. Based on first day returns, earning positive mean returns is very difficult even when most IPO’s are purchased at the offer price. Mean daily trade volume for the first five days of IPO trading is large relative to the means for the first thirty days and for longer periods. The dollar volume of sells is always significantly larger than that of buys suggesting that institutional investors are active on the sell side in the aftermarket. Liquidity as measured by quoted depth is initially large and decays rapidly over time. Gross returns are often low or negative, and average round-trip trade costs increase from 1.5% to 2.9% and 1.8% to 3.7% for more and less patient traders, respectively, over the first nine months of trading for an average IPO. Early amortized spreads are relatively large due to large initial share turnover.