STABILIZATION, SYNDICATION, AND PRICING OF IPOS

We argue that in the after-market trading of an IPO, the underwriting syndicate, by standing ready to buy back shares at the offer price ('' price stabilization''), compensates uninformed investors ex post for t he adverse selection cost they face in bidding for IPOs. This dominate s ex ante compensation by underpricing. The reason is that stabilizati on exploits ex post information about investor demand whereas underpri cing must be based on ex ante information. However, liquidity and synd ication costs constrain the use of stabilization which, in equilibrium , generates some underpricing as well. We develop a model that formali zes this intuition and generates several empirical implications.