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Public information and IPO underpricing

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Author Info

  • Bakke, Einar

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Leite, Tore E.

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

  • Thorburn, Karin S.

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

We analyze the effect of public information on rational investors' incentives to reveal private information during the bookbuilding process and their demand for allocations in the IPO. Our model generates several new predictions. First, investors require more underpricing to truthfully reveal positive private information in bear markets than in bull markets (the incentive effect). Second, the fraction of positive private signals and of underpriced IPOs is increasing in market returns (the demand effect). Combined, these two effects can explain why IPO underpricing is positively related to pre-issue market returns, consistent with extant evidence. Using a sample of 5,000 U.S. IPOs from 1981-2008, we show that the empirical implications of the model are borne out in the data.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2010/6.

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Length: 37 pages
Date of creation: 24 Aug 2010
Date of revision:
Handle: RePEc:hhs:nhhfms:2010_006

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Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Keywords: Public information; partial adjustment; underpricing; IPOs; bookbuilding;

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  1. Kenji Kutsuna & Janet Kiholm Smith & Richard L. Smith, 2009. "Public Information, IPO Price Formation, and Long-Run Returns: Japanese Evidence," Journal of Finance, American Finance Association, vol. 64(1), pages 505-546, 02.
  2. Bradley, Daniel J. & Jordan, Bradford D., 2002. "Partial Adjustment to Public Information and IPO Underpricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(04), pages 595-616, December.
  3. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
  4. Sherman, Ann E., 2005. "Global trends in IPO methods: Book building versus auctions with endogenous entry," Journal of Financial Economics, Elsevier, vol. 78(3), pages 615-649, December.
  5. Lawrence M. Benveniste & Alexander Ljungqvist & William J. Wilhelm & Xiaoyun Yu, 2003. "Evidence of Information Spillovers in the Production of Investment Banking Services," Journal of Finance, American Finance Association, vol. 58(2), pages 577-608, 04.
  6. William Wilhelm & Alexander Ljungqvist, 2001. "IPO Allocations: Discriminatory or Discretionary?," Economics Series Working Papers 2001-FE-08, University of Oxford, Department of Economics.
  7. Tim Jenkinson & Howard Jones, 2004. "Bids and Allocations in European IPO Bookbuilding," Journal of Finance, American Finance Association, vol. 59(5), pages 2309-2338, October.
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