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Equilibrium in the Initial Public Offerings Market

Author

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  • Jay R. Ritter

    () (Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611)

Abstract

In this review, I criticize the ability of popular asymmetric information-based models to explain the magnitude of the underpricing of initial public offerings (IPOs) that is observed. I suggest that the quantitative magnitude of underpricing can be explained with a market structure in which underwriters want to underprice excessively, issuers are focused on services bundled with underwriting rather than on maximizing the offer proceeds, and there is limited competition between underwriters. Since the technology bubble burst in 2000, U.S. IPO volume has been low. Although regulatory burdens undoubtedly account for some of the decline, I suggest that much of the decline may be due to a structural shift that has lessened the profitability of small independent companies relative to their value as part of a larger, more established organization that can realize economies of scope. I also discuss the long-run performance literature. My interpretation of the evidence is that except for the smallest companies going public, IPOs have long-run returns that are similar to those on seasoned stocks with the same characteristics.

Suggested Citation

  • Jay R. Ritter, 2011. "Equilibrium in the Initial Public Offerings Market," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 347-374, December.
  • Handle: RePEc:anr:refeco:v:3:y:2011:p:347-374
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-102710-144845
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    Cited by:

    1. repec:eee:respol:v:46:y:2017:i:6:p:1133-1141 is not listed on IDEAS
    2. repec:eee:corfin:v:47:y:2017:i:c:p:253-268 is not listed on IDEAS
    3. Jay R. Ritter & Andrea Signori & Silvio Vismara, 2013. "Economies of scope and IPO activity in Europe," Chapters,in: Handbook of Research on IPOs, chapter 1, pages 11-34 Edward Elgar Publishing.
    4. Neupane, Suman & Rhee, S. Ghon & Vithanage, Kulunu & Veeraraghavan, Madhu, 2017. "Trade-based manipulation: Beyond the prosecuted cases," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 115-130.
    5. repec:eee:pacfin:v:46:y:2017:i:pb:p:258-268 is not listed on IDEAS
    6. Morricone, Serena & Munari, Federico & Oriani, Raffaele & de Rassenfosse, Gaetan, 2017. "Commercialization Strategy and IPO Underpricing," Research Policy, Elsevier, vol. 46(6), pages 1133-1141.
    7. repec:spr:infosf:v:19:y:2017:i:3:d:10.1007_s10796-017-9753-3 is not listed on IDEAS
    8. Naaguesh Appadu & Anna Faelten & Mario Levis, 2013. "Acquisitions, SEOs, divestitures and IPO performance," Chapters,in: Handbook of Research on IPOs, chapter 17, pages 347-374 Edward Elgar Publishing.
    9. Michael Cichello & Douglas J. Lamdin, 2016. "The location of initial public offering headquarters: An empirical examination," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(1), pages 1-18, January.
    10. Guldiken, Orhun & Tupper, Christina & Nair, Anil & Yu, Huizhi, 2017. "The impact of media coverage on IPO stock performance," Journal of Business Research, Elsevier, vol. 72(C), pages 24-32.
    11. Dorsman, André & Gounopoulos, Dimitrios, 2013. "European Sovereign Debt Crisis and the performance of Dutch IPOs," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 308-319.
    12. repec:eee:corfin:v:47:y:2017:i:c:p:151-173 is not listed on IDEAS
    13. Mauer, David C. & Wang, Song & Wang, Xiao & Zhang, Yilei, 2015. "Global diversification and IPO returns," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 436-456.
    14. Jeon, Jin Q. & Lee, Cheolwoo & Nasser, Tareque & Via, M. Tony, 2015. "Multiple lead underwriter IPOs and firm visibility," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 128-149.
    15. Lorne N. Switzer & Jun Wang, 2017. "An event based approach for quantifying the effects of securities fraud in the IT industry," Information Systems Frontiers, Springer, vol. 19(3), pages 457-467, June.
    16. Jagannathan, Ravi & Jirnyi, Andrei & Sherman, Ann Guenther, 2015. "Share auctions of initial public offerings: Global evidence," Journal of Financial Intermediation, Elsevier, vol. 24(3), pages 283-311.
    17. Klein, Peter G. & Wuebker, Robert & Zoeller, Kathrin, 2016. "Relationship banking and conflicts of interest: Evidence from German initial public offerings," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 210-221.

    More about this item

    Keywords

    adverse selection; bookbuilding; IPOs; long-run performance; market timing; underpricing;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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