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The Pricing of Initial Public Offerings: An Option Approach

In: Advances In Quantitative Analysis Of Finance And Accounting

Author

Listed:
  • Sheen Liu

    (Washington State University-Vancouver, USA)

  • Chunchi Wu

    (Singapore Management University, Singapore)

  • Peter Huaiyu Chen

    (Youngstown State University, USA)

Abstract

This chapter proposes a theoretical model of initial public offering by taking into account the uncertainty in security pricing and the underwriting process. Three major factors are shown to affect the IPO pricing: (1) the uncertainty of stock price, (2) the legal requirement that restricts underwriters from selling any part of the issue above the fixed offering price, and (3) the underwriters' risk tolerance. It is shown that underpricing is negatively related to the underwriter's risk tolerance, and positively related to the length of premarket period and market price volatility.

Suggested Citation

  • Sheen Liu & Chunchi Wu & Peter Huaiyu Chen, 2008. "The Pricing of Initial Public Offerings: An Option Approach," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting, chapter 7, pages 127-141, World Scientific Publishing Co. Pte. Ltd..
  • Handle: RePEc:wsi:wschap:9789812791696_0007
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    More about this item

    Keywords

    Hedging Strategies; Expense Mismatching; Stock Split; Trading Volume; Portfolio Optimization; Intraday Patterns; Earnings Management; International Winner-Loser Effect;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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