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Strategic underpricing in public offerings: The role of firm quality

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Listed:
  • Amrit Panda

    (O.P. Jindal Global University
    Indian Institute of Management Sambalpur)

  • Soumya Guha Deb

    (Indian Institute of Management Sambalpur)

Abstract

In the presence of asymmetric information between insiders and outsiders of the firm, the actions of the managers, such as underpricing, may signal the prospects of the firms. Using an extensive dataset encompassing over 6,200 Initial Public Offerings (IPOs) and (Seasoned Equity Offerings) SEOs instances from 2001 to 2021 across 11 countries, the study shows that underpricing diminishes with each subsequent SEO round, with high-quality (HQ) firms experiencing this decline more rapidly compared to low-quality (LQ) firms. Our analysis, incorporating six dimensions of firm quality identifying the profitability, operational efficiency, financial health, and earnings quality of the firm, suggests a strategic underpricing of IPOs by particularly HQ firms to offset initial losses in future SEOs. The consistency of these results is affirmed through rigorous robustness checks. This research adds a fresh empirical perspective to the IPO and SEO discourse, offering valuable insights that can guide investors, issuers, regulatory bodies, and market observers in making more informed, strategic decisions.

Suggested Citation

  • Amrit Panda & Soumya Guha Deb, 2024. "Strategic underpricing in public offerings: The role of firm quality," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(4), pages 1078-1096, December.
    • Handle: RePEc:spr:jecfin:v:48:y:2024:i:4:d:10.1007_s12197-024-09686-7
    DOI: 10.1007/s12197-024-09686-7
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    More about this item

    Keywords

    IPO; SEO; Firm Quality; Underpricing; Information Asymmetry;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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