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Clustering of initial public offerings, information revelation and underpricing

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  • Hoffmann-Burchardi, Ulrike

Abstract

By providing an analysis of sequential going-public decisions the paper outlines conditions under which "hot issue markets" arise, i.e. under which the likelihood of a second initial public offering increases after a first firm has gone public. Two effects can trigger the rise of hot issue markets in a setting with asymmetric and costly information about both firm quality and industry prospects. The risk-averse entrepreneur can be subject to risk-induced selling pressure because of uncertain industry prospects conveyed by a first IPO in the industry. Also, investors can free-ride on the industry news, and increase their valuation for a second firm by abstaining from further costly information production. Finally, the model offers an explanation for the empirical finding that hot issue markets exhibit a higher degree of underpricing than cold issue markets.

Suggested Citation

  • Hoffmann-Burchardi, Ulrike, 1999. "Clustering of initial public offerings, information revelation and underpricing," LSE Research Online Documents on Economics 119129, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119129
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    File URL: http://eprints.lse.ac.uk/119129/
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    More about this item

    Keywords

    initial public offerings; asymmetric information; clustering; underpricing;
    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

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