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A Theory of the Distribution of Underpriced Initial Public Offers by Investment Banks


  • Fulghieri, Paolo
  • Spiegel, Matthew


It is well documented that a firm may choose to offer underpriced securities in an initial public offer. An open question is why investment banks do not retain underpriced offers in their portfolio. We argue that the distribution of underpriced securities allows banks of high quality to signal their value to their customers, promoting in this way their other product lines. We show that the total dollar value of underpriced securities distributed (rather than the percentage value) acts as the signal. We also find that, all else equal, larger customers and those with more elastic demand functions receive a larger total dollar value of underpricing. Copyright 1993 by MIT Press.

Suggested Citation

  • Fulghieri, Paolo & Spiegel, Matthew, 1993. "A Theory of the Distribution of Underpriced Initial Public Offers by Investment Banks," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(4), pages 509-530, Winter.
  • Handle: RePEc:bla:jemstr:v:2:y:1993:i:4:p:509-30

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    Cited by:

    1. Griffin, John M. & Harris, Jeffrey H. & Topaloglu, Selim, 2007. "Why are IPO investors net buyers through lead underwriters?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 518-551, August.
    2. Stavros Peristiani, 2003. "Evaluating the riskiness of initial public offerings: 1980-2000," Staff Reports 167, Federal Reserve Bank of New York.
    3. 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.
    4. Sonia Falconieri & Albert Murphy & Daniel Weaver, 2009. "Underpricing and Ex Post Value Uncertainty," Financial Management, Financial Management Association International, vol. 38(2), pages 285-300, June.

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