On May 18, 2012 Facebook held its initial public offering (IPO), raising over $16 billion making it one of the largest IPOs in history. To the surprise of many investors, there was no underpricing―the stock closed the first day of trading flat from its offer price. The Facebook IPO was described as not only disappointing but also detrimental to the broader market. We explore why one IPO should have such widespread consequences. We document that the IPO market was silent for 41days following Facebook. When it re-opened 41days later, the average level of underpricing increased from 11% pre-Facebook to 20% post-Facebook. The common blame was an overall increase in risk-aversion among investors. We offer an alternative explanation. We show that the entire increase in underpricing is concentrated in the IPOs of the Facebook lead underwriters. We find no statistical difference in underpricing pre- and post-Facebook for non-Facebook underwriters. We argue that investment bank loyalty to their institutional investor client based propelled the Facebook underwriters to increase underpricing to compensate for the perceived losses on Facebook.

In the mid-1990s, 30% of firms completing an SEO within three years of their IPO switched lead underwriter. This article provides evidence on why they switched. Contrary to predictions of prior research, there is little evidence that firms switch due to dissatisfaction with underwriter performance at the time of the IPO. A surprising result is that switchers’ IPOs were significantly less underpriced than non-switchers’ IPOs. However, switchers raised fewer proceeds than expected, compared to the mid-point of the filing range, while non-switchers raised significantly more proceeds. There are two main reasons for switching. Firms graduate to higher reputation underwriters, and they strategically buy additional and influential analyst coverage from the new lead underwriter. Survey results support these conclusions.

Little is known about the timing and execution of open market repurchases. U.S. firms are under no obligation to disclose when they are trading, and generally report only quarterly changes in shares outstanding. We use 64 firms' supplementally disclosed repurchase trading data to provide the first examination of repurchase timing and execution. Across the days reported in our sample, firms adopted a variety of execution styles ranging from immediate intense repurchasing to delayed and smoothed repurchasing. We find no clear evidence that repurchases are timed to coincide with, precede, or follow, days on which information is released. We benchmark the costs and value of a given repurchase program against naive accumulation strategies achieving the same terminal portfolio. While there is considerable variation across the firms, NYSE firms on average beat their benchmarks, whereas NASDAQ firms do not. Finally, we document the liquidity impact of open market repurchases. We find that repurchasing contributes to market liquidity by narrowing bid-ask spreads and attenuating the price impact of order imbalances on days when repurchase trades are completed.

This paper examines underwriters' pricing errors and the information content of first‐day trading activity in IPOs. We show that first‐day winners continue to be winners over the first year, and first‐day dogs continue to be relative dogs. Exceptions are “extra‐hot” IPOs, which provide the worst future performance. We also demonstrate that large, supposedly informed, traders “flip” IPOs that perform the worst in the future. IPOs with low flipping generate abnormal returns of 1.5 percentage points per month over the first six months beginning on the third day. We show that flipping is predictable and conclude that underwriters' pricing errors are intentional.

This paper examines underwriters' pricing errors and the information content of first‐day trading activity in IPOs. We show that first‐day winners continue to be winners over the first year, and first‐day dogs continue to be relative dogs. Exceptions are “extra‐hot” IPOs, which provide the worst future performance. We also demonstrate that large, supposedly informed, traders “flip” IPOs that perform the worst in the future. IPOs with low flipping generate abnormal returns of 1.5 percentage points per month over the first six months beginning on the third day. We show that flipping is predictable and conclude that underwriters' pricing errors are intentional.

Managers usually do not sell any of their own shares in an initial public offering but instead wait until the end of the lockup period. We develop a model in which managers strategically underprice IPOs to maximize personal wealth from selling shares at lockup expiration. First-day underpricing generates information momentum by attracting attention to the stock and thereby shifting the demand curve for the stock outwards. This allows managers to sell shares at the lockup expiration at prices higher than they would otherwise obtain. We test the model on a sample of IPOs in the 1990s. We find that higher ownership by managers is positively correlated with first-day underpricing, underpricing is positively correlated with research coverage, and research coverage is positively correlated with stock returns and insider selling at the lockup expiration. These results are consistent with the model.

Little is known about the timing and execution of open market repurchases. U.S. firms are under no obligation to disclose when they are trading, and generally report only quarterly changes in shares outstanding. We use 64 firms' supplementally disclosed repurchase trading data to provide the first examination of repurchase timing and execution. Across the days reported in our sample, firms adopted a variety of execution styles ranging from immediate intense repurchasing to delayed and smoothed repurchasing. We find no clear evidence that repurchases are timed to coincide with, precede, or follow, days on which information is released. We benchmark the costs and value of a given repurchase program against naive accumulation strategies achieving the same terminal portfolio. While there is considerable variation across the firms, NYSE firms on average beat their benchmarks, whereas NASDAQ firms do not. Finally, we document the liquidity impact of open market repurchases. We find that repurchasing contributes to market liquidity by narrowing bid-ask spreads and attenuating the price impact of order imbalances on days when repurchase trades are completed.

Before the IPO bubble burst, the first day return for IPOs backed by top VC firms was double that of non-top VC IPOs. Top VC IPOs were also twice as likely to receive all-star analyst coverage and suffered twice as large negative returns upon lockup expiration. We argue that this was not a coincidence. Underwriters benefited from underpricing vis-à-vis allocation strategies whereas VCs gain from information momentum which allows them to cash-out at higher prices at lockup expiration. All-stars are a scarce resource underwriters allocate to their best clients (top VCs) who bring them repeat business. Post-bubble, regulatory shocks restricted preferential IPO allocations and reduced the value of all-star coverage. Consequently, these relations disappeared indicating that regulatory changes likely had the desired effect.