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Issuer IPO underpricing and Directed Share Program (DSP)

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  • Chong, Beng Soon
  • Liu, Zhenbin

Abstract

The issuer underpricing hypothesis addresses why IPOs with a Directed Share Program (DSP) are substantially more underpriced and why the issuers are not upset over the additional money left on the table. In support of the hypothesis, we find that both the final size and likelihood of DSP adoption are greater when expected IPO underpricing is high. Issuers with a DSP also strategically underprice their IPO through a downward bias in offer price adjustments, but will do so only when the cost is not prohibitive. Finally, the first-day IPO return is relatively higher when directed shares are allocated to customers.

Suggested Citation

  • Chong, Beng Soon & Liu, Zhenbin, 2020. "Issuer IPO underpricing and Directed Share Program (DSP)," Journal of Empirical Finance, Elsevier, vol. 56(C), pages 105-125.
    • Handle: RePEc:eee:empfin:v:56:y:2020:i:c:p:105-125
    DOI: 10.1016/j.jempfin.2020.01.003
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    References listed on IDEAS

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    More about this item

    Keywords

    Directed share program; Initial public offerings; IPO underpricing; Partial adjustment phenomenon; Prospect theory; Lockup;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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