Underpricing, Share Retention, and the IPO Aftermarket Liquidity

We test how underpricing and the proportion of shares retained by the pre-IPO owners (share retention) affect the IPO aftermarket liquidity. Our results show that initial return is positively related to turnover and negatively related to percentage spread. These relationships are significant even after controlling for other factors, supporting Booth and Chua's (1996) liquidity theory. We also find that the pre-IPO owners' retention rate is positively related to turnover and negatively related to percentage spread. This suggests that high retention rates attract more trades, provide quality assurance, and improve IPO aftermarket liquidity