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Public information and IPO underpricing

Author

Listed:
  • 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.

Suggested Citation

  • Bakke, Einar & Leite, Tore E. & Thorburn, Karin S., 2010. "Public information and IPO underpricing," Discussion Papers 2010/6, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2010_006
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    File URL: http://hdl.handle.net/11250/164158
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    References listed on IDEAS

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    More about this item

    Keywords

    Public information; partial adjustment; underpricing; IPOs; bookbuilding;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • 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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