Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence
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.
|Date of creation:||1999|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.finance.ox.ac.uk|
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:sbs:wpsefe:1999fe03. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maxine Collett)
If references are entirely missing, you can add them using this form.