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Signaling in the Internet craze of initial public offerings

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  • Cao, Melanie
  • Shi, Shouyong

Abstract

In this paper we analyze the clustering phenomenon of underpricing in initial public offerings (IPOs), where firms in a particular industry choose to issue their new shares at the same time and at great discounts. The industry consists of many firms that have private in-formation about their own qualities (high or low) and that must raise external capital first before production. In the product market, firms compete through quality ladders, where each high-quality firm monopolizes the production of a particular variety of product. We show that self-fulfilling multiple equilibria arise. In one, no firm underprices the IPO. In the other, all high-quality firms underprice their IPOs, resulting in clustering. Moreover, the clustering is more likely to occur in economic upturns than in downturns, and in an easy credit market than in a tight market.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 12 (2006)
Issue (Month): 4 (September)
Pages: 818-833

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Handle: RePEc:eee:corfin:v:12:y:2006:i:4:p:818-833

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Web page: http://www.elsevier.com/locate/jcorpfin

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  1. Mauer, David C. & Senbet, Lemma W., 1992. "The Effect of the Secondary Market on the Pricing of Initial Public Offerings: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(01), pages 55-79, March.
  2. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 213-232.
  3. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, Elsevier, vol. 23(2), pages 303-323, August.
  4. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, Elsevier, vol. 24(2), pages 343-361.
  5. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
  6. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 187-212.
  7. Hoffmann-Burchardi, Ulrike, 2001. "Clustering of initial public offerings, information revelation and underpricing," European Economic Review, Elsevier, vol. 45(2), pages 353-383, February.
  8. Melanie Cao & Shouyong Shi, 1999. "Publicity and the Clustering of IPO Underpricing," Working Papers, Queen's University, Department of Economics 990, Queen's University, Department of Economics.
  9. Mark Grinblatt & Chuan Yang Hwang, . "Signalling and the Pricing of Unseasoned New Issues," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 01-89, Wharton School Rodney L. White Center for Financial Research.
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  13. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  14. Stoughton, Neal M & Wong, Kit Pong & Zechner, Josef, 2001. "IPOs and Product Quality," The Journal of Business, University of Chicago Press, vol. 74(3), pages 375-408, July.
  15. Stavros Peristiani & Gijoon Hong, 2004. "Pre-IPO financial performance and aftermarket survival," Current Issues in Economics and Finance, Federal Reserve Bank of New York, Federal Reserve Bank of New York, vol. 10(Feb).
  16. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(3), pages 797-817, August.
  17. Michaely, Roni & Shaw, Wayne H, 1994. "The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 279-319.
  18. Tim Loughran & Jay R. Ritter, 2002. "Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 413-444, March.
  19. Welch, Ivo, 1989. " Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 44(2), pages 421-49, June.
  20. Slovin, Myron B. & Young, John E., 1990. "Bank lending and initial public offerings," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 729-740, October.
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Citations

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Cited by:
  1. Johan, Sofia A., 2010. "Listing standards as a signal of IPO preparedness and quality," International Review of Law and Economics, Elsevier, Elsevier, vol. 30(2), pages 128-144, June.
  2. An, Heng (Hunter) & Chan, Kam C., 2008. "Credit ratings and IPO pricing," Journal of Corporate Finance, Elsevier, Elsevier, vol. 14(5), pages 584-595, December.
  3. Bradley, Daniel J. & Gonas, John S. & Highfield, Michael J. & Roskelley, Kenneth D., 2009. "An examination of IPO secondary market returns," Journal of Corporate Finance, Elsevier, Elsevier, vol. 15(3), pages 316-330, June.

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