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A market microstructure explanation of IPOs underpricing

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  • Leoni, Patrick L.

Abstract

In an IPO game with first-price auctions, we show that the noisier the inferences of risk-averse rational investors about the firm's value (in the sense of first-order stochastic dominance) the higher the underbidding. Underpricing occurs independently of winner's curse effects.

Suggested Citation

  • Leoni, Patrick L., 2008. "A market microstructure explanation of IPOs underpricing," Economics Letters, Elsevier, vol. 100(1), pages 47-48, July.
    • Handle: RePEc:eee:ecolet:v:100:y:2008:i:1:p:47-48
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    References listed on IDEAS

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    1. Leite, Tore, 2005. "Returns to sentiment investors in IPOs," Economics Letters, Elsevier, vol. 89(2), pages 222-226, November.
    2. Biais, Bruno & Faugeron-Crouzet, Anne Marie, 2002. "IPO Auctions: English, Dutch, ... French, and Internet," Journal of Financial Intermediation, Elsevier, vol. 11(1), pages 9-36, January.
    3. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    4. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
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    Cited by:

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    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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