IDEAS home Printed from
   My bibliography  Save this paper

Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence


  • Michel Habib
  • Alexander Ljungqvist


We model underpricing as being endogenous to the wealth loss minimization problem encountered in a stock market flotation. The benefits of reducing underpricing depend on the entrepreneur`s participation in the offering, via the secondary shares he sells, as well as the magnitude of the dilution he suffers on his retained shares, which increases in the number of newly issued shares. However, reducing underpricing is costly. Therefore, it is not surprising that there is positive underpricing in equilibrium, as entrepreneurs trade off the costs and benefits of lower underpricing. Using two large data sets of US IPOs, we find support for the comparative statics predictions of our model, in particular those which distinguish our model from existing work. We also find support for the prediction that equilibrium wealth losses are unrelated to the level of underpricing-reduction costs and the quality of underwriter, which indicates that entrepreneurs choose such variables optimally. Non-monetary considerations such as private benefits of control appear not to be taken into account by the entrepreneur. Our empirical results are robust to a number of economic and econometric considerations.

Suggested Citation

  • Michel Habib & Alexander Ljungqvist, 1999. "Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence," Economics Series Working Papers 1999-FE-03, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:1999-fe-03

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    More about this item


    Initial public offerings; underpricing; wealth losses;
    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


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:1999-fe-03. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anne Pouliquen (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.