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Signaling in the Internet craze of initial public offerings

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  • Cao, Melanie
  • Shi, Shouyong

Abstract

In this paper we analyze the clustering phenomenon of underpricing in initial public offerings (IPOs), where firms in a particular industry choose to issue their new shares at the same time and at great discounts. The industry consists of many firms that have private in-formation about their own qualities (high or low) and that must raise external capital first before production. In the product market, firms compete through quality ladders, where each high-quality firm monopolizes the production of a particular variety of product. We show that self-fulfilling multiple equilibria arise. In one, no firm underprices the IPO. In the other, all high-quality firms underprice their IPOs, resulting in clustering. Moreover, the clustering is more likely to occur in economic upturns than in downturns, and in an easy credit market than in a tight market.
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  • 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.
    • Handle: RePEc:eee:corfin:v:12:y:2006:i:4:p:818-833
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    1. An, Heng (Hunter) & Chan, Kam C., 2008. "Credit ratings and IPO pricing," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 584-595, December.
    2. Johan, Sofia A., 2010. "Listing standards as a signal of IPO preparedness and quality," International Review of Law and Economics, Elsevier, vol. 30(2), pages 128-144, June.
    3. Dimitrios Gounopoulos & Georgios Loukopoulos & Panagiotis Loukopoulos, 2021. "CEO education and the ability to raise capital," Corporate Governance: An International Review, Wiley Blackwell, vol. 29(1), pages 67-99, January.
    4. Wu, Shuai, 2023. "Impact of serial entrepreneurs on IPO valuation: Evidence from U.S. IPOs," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    5. Reddy, K. Srinivasa, 2011. "The aftermarket pricing performance of initial public offers: Insights from India," MPRA Paper 62885, University Library of Munich, Germany, revised 2013.
    6. Xudong Fu & Janet Hamilton & Qin Lian & Tian Tang & Qiming Wang, 2021. "New institutional investors in the IPO secondary market: Sentiment or fundamentals?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(2), pages 299-341, June.
    7. Bradley, Daniel J. & Gonas, John S. & Highfield, Michael J. & Roskelley, Kenneth D., 2009. "An examination of IPO secondary market returns," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 316-330, June.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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