Paul H. Schultz

Market Structure and the Intraday Pattern of Bid-Ask Spreads for NASDAQ Securities

This article examines the intraday pattern of bid-ask spreads among NASDAQ stocks. We find that spreads are relatively stable throughout the day but narrow significantly near the close. This contrasts with the U-shaped pattern for NYSE stocks reported by Brock and Kleidon and McInish and Wood. We attribute these divergent patterns to structural differences between specialist and dealer markets. The wider spreads for NYSE stocks near periods of market closure may reflect the market power of specialists. The decline in spreads near the close for NASDAQ stocks is consistent with inventory control by individual dealers. Copyright 1995 by University of Chicago Press.

The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition

We examine syndicates for 1,638 IPOs from January 1997 through June 2002. We find strong evidence of information production by syndicate members. Offer prices are more likely to be revised in response to information when the syndicate has more underwriters and especially more co-managers. More comanagers also result in more analyst coverage and additional market makers following the IPO. Relationships between underwriters are critical in determining the composition of syndicates, perhaps because they mitigate free-riding and moral hazard problems. While there appear to be benefits to larger syndicates, we discuss several factors that may limit syndicate size. Almost all IPO syndicates include one or more co-managers and several non-managing underwriters. Despite this, there has been almost no recent academic research on the functions of syndicate members or the determinants of syndicate participation. What determines the structure of an IPO syndicate? What purpose do co-managers and non-managing syndicate members serve? In this paper, we use a sample of 1,638 IPOs from January 1997 through June 2002 to examine these questions. We find evidence of information production by syndicate members. Specifically, we examine how syndicate structure affects the likelihood and magnitude of offer price revisions in response to information revealed during the filing period. As a proxy for this information, we use the total return from the midpoint of the filing price range to the closing price on the first day of trading. We find that offer prices are more likely to be adjusted up (down) in response to positive (negative) information when the underwriting syndicate is less concentrated or has more co-managers. We note that upward price revisions generally result in reduced underpricing. However, after controlling for price revisions, we find no additional relation between syndicate structure and IPO underpricing. Information from co-managers can be conveyed to the book manager in two ways. First, underwriters may relay information about market interest in an IPO directly to the book manager. Underwriters that we spoke with said they often talked to some book managers during the IPO process. Second, co-managers may convey information indirectly through conversations with the issuer, who then uses this information in negotiations with the book manager. Since issuers are more likely to bring up positive information during pricing negotiations, we expect that information conveyed by co-managers “whispering in the issuer’s ear” will more likely lead to upward than downward price revisions. Thus, our finding that syndicate structure affects both upward and downward price revisions suggests that comanagers relay information directly to the book manager in at least some cases. Syndicate members also provide analyst coverage and market making services in the aftermarket. All else being equal, we show that each additional co-manager in a syndicate results in one additional market maker. We also find that each additional co-manager results in 0.8 additional analysts issuing reports in the three months after an IPO. The number of non-managing syndicate members is not significantly related to either analyst coverage or market making in the aftermarket. Additional evidence on the importance of analyst coverage comes from our probit model estimates of the determinants of syndicate participation. For large IPOs, we find that having a top-ranked analyst in the issuer’s industry significantly increases the likelihood that an underwriter is included in a syndicate either as a co-manager or in a non-managing role. We also find that geography is a significant determinant of syndicate participation. Underwriters are more likely to be included in a syndicate if they are in the same state as the issuer, particularly if the book manager is based elsewhere. This suggests that

Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks

The relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate. On January 20, 1997, the Securities and Exchange Commission began implementing reforms that would permit the public to compete directly with Nasdaq dealers by submitting binding limit orders. Additionally, superior quotes placed by Nasdaq dealers in private trading venues began to be displayed in the Nasdaq market. We measure the impact of these new rules on various measures of performance, including trading costs and depths. Our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality. Copyright The American Finance Association 1999.

Corporate Bond Trading Costs: A Peek Behind the Curtain

In this paper, I use institutional corporate bond trade data to estimate transactions costs in the over-the-counter bond market. I find average round-trip trading costs to be about

Unit initial public offerings *1: A form of staged financing

0.27 per

Stock Splits, Tick Size, and Sponsorship

100 of par value. Trading costs are lower for larger trades. Small institutions pay more to trade than large institutions, all else being equal. Small bond dealers charge more than large ones. I find no evidence that trading costs more for lower-rated bonds. Copyright The American Finance Association 2001.

Aftermarket support and underpricing of initial public offerings

Abstract Units are bundles of common stock and warrants. By selling initial public offerings (IPOs) of units, firms precommit to sell more stock in the future at the warrants exercise price. Sequential offerings of this type reduce the agency costs of giving management a potential free cash flow at the IPO. Consistent with this theory, firms that choose unit IPOs are smaller, have less income and assets in relation to their IPO proceeds, and are less likely to survive than firms that issue shares.

Transaction costs and the small firm effect: A comment

A traditional explanation for stock splits is that they increase the number of small shareholders who own the stock. A possible reason for the increase is that the minimum bid-ask spread is wider after a split and brokers have more incentive to promote a stock. I document a large number of small buy orders following Nasdaq and NYSE/AMEX splits during 1993 to 1994. I also find strong evidence that trading costs increase, and weak evidence that costs of market making decline following splits. This is consistent with splits acting as an incentive to brokers to promote stocks. Copyright The American Finance Association 2000.

The Trading Profits of SOES Bandits

Abstract We study the aftermarket for 72 initial public offerings (IPOs) using comprehensive trade and quote-change data from every market maker for the first three days of trading. Underwriters quote higher bid prices than other market makers for issues that commence trading at or below the offer price. Underwriters repurchase large quantities of stock in the aftermarket without risk by overselling the issue by the amount of the overallotment option. If the IPO is hot, the overallotment option is exercised. If not, the short position is covered with aftermarket selling. We discuss several reasons for underwriter support.

Who makes markets

Abstract Stoll and Whaley (1983) suggest large transaction costs may be responsible for the large risk-adjusted returns earned by small firm stocks. This study, using data from the AMEX as well as the NYSE, shows that investors can earn risk-adjusted excess returns after transaction costs by holding small firms for relatively short holding periods. Other literature that provides evidence that is inconsistent with the transaction costs hypothesis is cited.