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A market microstructure explanation of IPOs underpricing

  • Patarick Leoni

    ()

    (Economics Department, National University of Ireland, Maynooth)

In a typical IPO game with first-price auctions, we argue that risk-averse investors always underbid in equilibrium because of subjective interpretations of the firm' communication about its actual value and resulting risk aversion about the likelihood of facing investors with higher valuations. We show that the noisier the investors' inferences of the firm' value (in the sense of first-order stochastic dominance) the higher the underbidding level. Our finding is independent of winner's curse effects and possible irrationality, and allows for a testable theory.

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File URL: http://repec.maynoothuniversity.ie/mayecw-files/N1770807.pdf
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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1770807.

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Length: 23 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:may:mayecw:n1770807
Contact details of provider: Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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  1. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
  2. Leite, Tore, 2005. "Returns to sentiment investors in IPOs," Economics Letters, Elsevier, vol. 89(2), pages 222-226, November.
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