limits appears to reduce overall underpricing but, on the other hand, it also delays and
complicates early price adjustment. We argue that these effects correspond to received
theoretical reasoning and correlated empirical ﬁndings from various markets and times. In
a broad sense, the explanation of variation in IPO underpricing across markets and times
cannot be oblivious to regulatory interventions, as several authors have argued (Loughran
et al., 1994). Furthermore, regulatory intervention itself must be evaluated in search for
policy implications, as regulators continue to seek effective tools whenever they perceive
market malfunction or failure.
Looking more speciﬁcally at after‐market arrangements for newly listed stocks, we
note that non‐discretionary trading limitations such as price limits, trading halts or circuit‐
breakers continue to be used in many markets, especially emerging ones. For example, as
recently as January 2012, SEBI, the Indian market regulator, imposed restrictive daily
price limits for ﬁrst‐day trading of IPO shares, attempting to ‘prevent IPO manipulation’,
in one of the largest emerging markets. Is this persistence of price limits warranted?
Price limits on stock market variation are a controversial subject both among
practitioners and scholars. The central issue is the speed and efﬁciency of price discovery.
Different lines of argument have been formulated about the impact of price limits on the
quality of price adjustment. One side argues that limits are inefﬁcient because they
suppress rapid price discovery after an information shock (Fama and French, 1989). A
contrary line suggests that limits offer opportunities for ‘cooling down’of investor
sentiment in an environment of information asymmetry, and thus allow for smoother price
adjustment (Hanley, 1993; Chowdhry and Nanda, 1998; Loughran and Ritter, 2002;
Thomadakis et al., 2012). Both these views, which we can summarise as the competing
‘information’and ‘overreaction’hypotheses, are concerned with price shocks due to
varying intensities and degrees of asymmetry of information. A considerable amount of
empirical works has attempted to distinguish between these competing hypotheses. The
impact of limits on volatility, serial correlation and price reversals has been studied with
mixed results. The two competing views –the ‘information’and the ‘overreaction’
hypotheses ‐lead to opposing regulatory implications about the desirability of limits.
An interesting variant of thinking relates to price change that is rooted not in pure
information shocks but in a different source of disturbance: market manipulation.
According to this view, the basic regulatory rationale for imposing price limits is to
constrain the potential for manipulation by market participants who have the means to
conduct manipulative schemes, (Kim and Park, 2010). This rationale seems to us to be
very pertinent to newly issued shares where asymmetries of information are more intense
and the potential for manipulation is larger, especially in emerging markets where weaker
competition and lack of contractual and investor sophistication weaken market‐based
deterrence to manipulation.
In the extensive literature on underpricing of IPOs, the effect of regulatory
interventions has been examined, although not price limits, speciﬁcally. An example
of this approach is the ‘regulatory overreach hypothesis’relating to the effects of the
Sarbanes‐Oxley act on US IPO activity (Gao et al., 2013). Arguing that Sarbanes‐Oxley
improves transparency of primary offerings, Johnston and Madura (2009) present
evidence that IPO underpricing in the US has declined after implementation of the act.
The Greek market in the 1990s, on which we focus, was classiﬁed as an ‘emerging
market’, despite its participation in the European Union and its alignment to European
legal arrangements. We have therefore paid special attention to tests of regulatory effects
in emerging markets. Based on evidence from the Paciﬁc Region, Loughran et al. (1994)
© 2014 John Wiley & Sons Ltd
278 Stavros Thomadakis et al.