We explain why underpricing in IPOs can be large in magnitude and clustered, using a signalling model where firms have private information about their qualities (high or low). A novel feature is that a firm, if perceived by the market as high quality, benefits from the industry's publicity which is an increasing function of the amount of IPO underpricing by all high-quality firms in the industry. Despite the potential free-rider problem created by the industry's publicity, we show that a high-quality firm chooses to underprice its own IPO as the best response to other high-quality firms' underpricing. Thus, IPO underpricing is clustered.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
990.
Find related papers by JEL classification: G30 - Financial Economics - - Corporate Finance and Governance - - - General D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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Gian Luca Clementi, 2004.
"IPO's and the Growth of Firms,"
Working Papers
04-23, New York University, Leonard N. Stern School of Business, Department of Economics.
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