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Publicity and the Clustering of IPO Underpricing

Listed author(s):
  • Melanie Cao

    (Queen's University)

  • Shouyong Shi

    (Queen's University)

We explain why underpricing in IPOs can be large in magnitude and clustered, using a signalling model where firms have private information about their qualities (high or low). A novel feature is that a firm, if perceived by the market as high quality, benefits from the industry's publicity which is an increasing function of the amount of IPO underpricing by all high-quality firms in the industry. Despite the potential free-rider problem created by the industry's publicity, we show that a high-quality firm chooses to underprice its own IPO as the best response to other high-quality firms' underpricing. Thus, IPO underpricing is clustered.

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File Function: First version 1999
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 990.

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Length: 36 pages
Date of creation: Jul 1999
Handle: RePEc:qed:wpaper:990
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