Public information and IPO underpricing
We analyze the effect of public information on rational investors' incentives to reveal private information during the bookbuilding process and their demand for allocations in the IPO. Our model generates several new predictions. First, investors require more underpricing to truthfully reveal positive private information in bear markets than in bull markets (the incentive effect). Second, the fraction of positive private signals and of underpriced IPOs is increasing in market returns (the demand effect). Combined, these two effects can explain why IPO underpricing is positively related to pre-issue market returns, consistent with extant evidence. Using a sample of 5,000 U.S. IPOs from 1981-2008, we show that the empirical implications of the model are borne out in the data.
|Date of creation:||24 Aug 2010|
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- Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
- Benveniste, Lawrence M & Ljungqvist, Alexander P. & Wilhelm Jr, William J & Yu, Xiaoyun, 2001.
"Evidence of Information Spillovers in the Production of Investment Banking Services,"
CEPR Discussion Papers
2988, C.E.P.R. Discussion Papers.
- Lawrence M. Benveniste & Alexander Ljungqvist & William J. Wilhelm & Xiaoyun Yu, 2003. "Evidence of Information Spillovers in the Production of Investment Banking Services," Journal of Finance, American Finance Association, vol. 58(2), pages 577-608, 04.
- Lawrence M. Benveniste & Alexander Ljungqvist & William J. Wilhelm & Xiaoyun Yu, 2002. "Evidence of Information Spillovers in the Production of Investment Banking Services," OFRC Working Papers Series 2002fe06, Oxford Financial Research Centre.
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"Bids and Allocations in European IPO Bookbuilding,"
Journal of Finance,
American Finance Association, vol. 59(5), pages 2309-2338, October.
- Kenji Kutsuna & Janet Kiholm Smith & Richard L. Smith, 2009.
"Public Information, IPO Price Formation, and Long-Run Returns: Japanese Evidence,"
Journal of Finance,
American Finance Association, vol. 64(1), pages 505-546, 02.
- Kenji Kutsuna & Janet Kiholm Smith & Richard L. Smith, 2006. "Public Information, IPO Price Formation, and Long-run Returns: Japanese Evidence," Discussion Papers 2006-22, Kobe University, Graduate School of Business Administration.
- Bradley, Daniel J. & Jordan, Bradford D., 2002. "Partial Adjustment to Public Information and IPO Underpricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(04), pages 595-616, December.
- William Wilhelm & Alexander Ljungqvist, 2001.
"IPO Allocations: Discriminatory or Discretionary?,"
OFRC Working Papers Series
2001fe08, Oxford Financial Research Centre.
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