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Publicity and the Clustering of IPO Underpricing

Author

Listed:
  • Melanie Cao

    (Queen's University)

  • Shouyong Shi

    (Queen's University)

Abstract

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.

Suggested Citation

  • Melanie Cao & Shouyong Shi, 1999. "Publicity and the Clustering of IPO Underpricing," Working Papers 990, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:990
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_990.pdf
    File Function: First version 1999
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    Cited by:

    1. Cao, Melanie & Shi, Shouyong, 2006. "Signaling in the Internet craze of initial public offerings," Journal of Corporate Finance, Elsevier, vol. 12(4), pages 818-833, September.
    2. Subadar Agathee, Ushad & Brooks, Chris & Sannassee, Raja Vinesh, 2012. "Hot and cold IPO markets: The case of the Stock Exchange of Mauritius," Journal of Multinational Financial Management, Elsevier, vol. 22(4), pages 168-192.
    3. Maher Kooli & Jean-Marc Suret, 2001. "The Underpricing of Initial Public Offerings: Further Canadian Evidence," CIRANO Working Papers 2001s-50, CIRANO.

    More about this item

    Keywords

    Initial public offering; Signalling; Externality; Multiple equilibria;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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