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A market microstructure explanation of IPOs underpricing

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  • Patarick Leoni

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    (Economics Department, National University of Ireland, Maynooth)

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    Abstract

    In 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 Info

    Paper 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.

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    Length: 23 pages
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:may:mayecw:n1770807

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    Keywords: IPO underpricing; first-price auction; risk aversion; firm' communication;

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