A market microstructure explanation of IPOs underpricing
AbstractIn a typical IPO game with first-price auctions, we argue that risk-averse investors always underbid in equilibrium because of subjective interpretations of the firm' communication about its actual value and resulting risk aversion about the likelihood of facing investors with higher valuations. We show that the noisier the investors' inferences of the firm' value (in the sense of first-order stochastic dominance) the higher the underbidding level. Our finding is independent of winner's curse effects and possible irrationality, and allows for a testable theory.
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Bibliographic InfoPaper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1770807.
Length: 23 pages
Date of creation: 2007
Date of revision:
IPO underpricing; first-price auction; risk aversion; firm' communication;
Find related papers by JEL classification:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-10-13 (All new papers)
- NEP-BEC-2007-10-13 (Business Economics)
- NEP-CFN-2007-10-13 (Corporate Finance)
- NEP-EXP-2007-10-13 (Experimental Economics)
- NEP-FMK-2007-10-13 (Financial Markets)
- NEP-MST-2007-10-13 (Market Microstructure)
- NEP-UPT-2007-10-13 (Utility Models & Prospect Theory)
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