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The Pricing of IPO Services and Issues: Theory and Estimation

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  • Ari Kang
  • Richard Lowery

Abstract

We estimate a model for the process for setting IPO spreads and offer prices. Weestablish that the partially rigid spread schedule observed for IPOs, where over 90% ofIPOs with proceeds between $20 and $80 million have a spread of 7%, can be rationalized asoptimal collusion. Optimal collusion creates a rationale for high underpricing, and we usedata on both spreads and underpricing to estimate structural parameters. Our estimatessuggest that firms benefit from holding IPOs but that idiosyncratic manager preferencesmay drive much of the IPO market. Much of the money left on the table is estimated toaccrue to underwriters.

Suggested Citation

  • Ari Kang & Richard Lowery, 2014. "The Pricing of IPO Services and Issues: Theory and Estimation," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 2(2), pages 188-234.
    • Handle: RePEc:oup:rcorpf:v:2:y:2014:i:2:p:188-234.
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    References listed on IDEAS

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    Cited by:

    1. Alan D Morrison & Carola Schenone & Aaron Thegeya & William J WilhelmJr., 2018. "Investment-Banking Relationships: 1933–2007," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 7(2), pages 194-244.
    2. Busaba, Walid Y. & Restrepo, Felipe, 2022. "The “7% solution” and IPO (under)pricing," Journal of Financial Economics, Elsevier, vol. 144(3), pages 953-971.
    3. James, Kevin R. & Valenzuela, Marcela, 2019. "The efficient IPO market hypothesis: theory and evidence," LSE Research Online Documents on Economics 118934, London School of Economics and Political Science, LSE Library.
    4. Evgeny Lyandres & Fangjian Fu & Erica X. N. Li, 2018. "Do Underwriters Compete in IPO Pricing?," Management Science, INFORMS, vol. 64(2), pages 925-954, February.
    5. Yue Cai, 2021. "Measuring Market Power in the IPO Underwriter," Working Papers 2108, Waseda University, Faculty of Political Science and Economics.
    6. Charles W. Calomiris & Yehuda Izhakian & Jaime F. Zender, 2019. "Underwriter Reputation, Issuer-Underwriter Matching, and SEO Performance," NBER Working Papers 26344, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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