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Publicity and the Clustering of IPO Underpricing

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Author Info

  • Melanie Cao

    (Queen's University)

  • Shouyong Shi

    (Queen's University)

Abstract

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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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_990.pdf
File Function: First version 1999
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 990.

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Length: 36 pages
Date of creation: Jul 1999
Date of revision:
Handle: RePEc:qed:wpaper:990

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Related research

Keywords: Initial public offering; Signalling; Externality; Multiple equilibria;

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Cited by:
  1. Cao Melanie & Shouyong Shi, 2002. "Signalling in the Internet Craze of Initial Public Offerings," Working Papers shouyong-02-03, University of Toronto, Department of Economics.
  2. Maher Kooli & Jean-Marc Suret, 2001. "The Underpricing of Initial Public Offerings: Further Canadian Evidence," CIRANO Working Papers 2001s-50, CIRANO.
  3. Subadar Agathee, Ushad & Brooks, Chris & Sannassee, Raja Vinesh, 2012. "Hot and cold IPO markets: The case of the Stock Exchange of Mauritius," Journal of Multinational Financial Management, Elsevier, vol. 22(4), pages 168-192.

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