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IPO Pricing Strategies with Deadweight and Search Costs

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  • Su Han Chan

    ()
    (Baruch College/CUNY)

  • Ko Wang

    ()
    (Baruch College/CUNY)

  • Jing Yang

    ()
    (California State University - Fullerton)

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Abstract

This paper builds a model to provide a complementary explanation to the well-known IPO pricing puzzle. Unlike existing theories in the field, our model does not assume that one agent (issuer, underwriter, informed investor, or uninformed investor) has superior information over another, nor that the pricing (or allocation) process is a tool for extracting information from the agent with superior information. We also pay no attention to the interactions between issuers and underwriters or to the investor sentiment (or underwriter activities) in the aftermarket. Instead, we allow the investor to make a decision on whether and when she should gather information (at a cost), and allow her to make a purchase decision based on the information she has gathered. With this investor's decision-making process in mind, firms price their IPOs to maximize their payoffs by trying to avoid an IPO failure (which is assumed to be costly to the firm) and by assessing the investor's possible post-search outcomes. While our model provides implications to the general IPO puzzle, the results seem particularly relevant for explaining the pricing of Real Estate Investment Trust (REIT) IPOs, Master Limited Partnership (MLP) IPOs, and mutual fund IPOs (for which the current theories fail to provide an adequate explanation). Our model may also help explain why IPO underpricing levels change over time and suggest that underpricing levels might vary across industries.

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Bibliographic Info

Article provided by American Real Estate Society in its journal journal of Real Estate Research.

Volume (Year): 31 (2009)
Issue (Month): 4 ()
Pages: 481-542

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Handle: RePEc:jre:issued:v:31:n:4:2009:p:481-542

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Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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Web page: http://www.aresnet.org/

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Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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Cited by:
  1. Su Chan & Jiajin Chen & Ko Wang, 2013. "Are REIT IPOs Unique? The Global Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 47(4), pages 719-759, November.

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