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IPO Underpricing Firm Quality, and Subsequent Reissuance Activity

Author

Listed:
  • Karen C. Denning

    (West Virginia University)

  • Stephen P. Ferris

    (Virginia Polytechnic Institute & State)

  • Glenn Wolfe

    (University of Toledo)

Abstract

A signaling argument has recently been developed whereby IPO underpricing is a signal of future firm value. Only higher quality firms can be expected to recover the cost of this signal through subsequent offerings of seasoned equities. This study uses three proxies for firm quality and finds evidence of a positive relationship between these measures of firm quality and reissuance activity. Greater IPO underpricing is also found to be associated with greater levels of future equity selling and higher levels of earnings per share.

Suggested Citation

  • Karen C. Denning & Stephen P. Ferris & Glenn Wolfe, 1992. "IPO Underpricing Firm Quality, and Subsequent Reissuance Activity," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 2(1), pages 71-86, Fall.
    • Handle: RePEc:pep:journl:v:2:y:1992:i:1:p:71-86
    as

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    References listed on IDEAS

    as
    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
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    3. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
    4. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232.
    5. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    6. Megginson, William L & Weiss, Kathleen A, 1991. "Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    7. Ritter, Jay R, 1984. "The "Hot Issue" Market of 1980," The Journal of Business, University of Chicago Press, vol. 57(2), pages 215-240, April.
    8. Downes, David H & Heinkel, Robert, 1982. "Signaling and the Valuation of Unseasoned New Issues," Journal of Finance, American Finance Association, vol. 37(1), pages 1-10, March.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    IPO; IPO Underpricing; Reissuance; Firm Quality;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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