A market microstructure explanation of IPOs underpricing

Patrick Leoni ()

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: In a typical IPO game with first-price auctions, we argue that risk-averse investors always underbid in equilibrium because of subjective interpretations of the firm' communication about its actual value and resulting risk aversion about the likelihood of facing investors with higher valuations. We show that the noisier the investors' inferences of the firm' value (in the sense of first-order stochastic dominance) the higher the underbidding level. Our finding is independent of winner's curse effects and possible irrationality, and allows for a testable theory.

Keywords: IPO underpricing; first-price auction; risk aversion; firm' communication (search for similar items in EconPapers)
JEL-codes: C7 D81 G12 G32 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2007
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-exp, nep-fmk, nep-mst and nep-upt
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Citations: View citations in EconPapers (1)

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Journal Article: A market microstructure explanation of IPOs underpricing (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:may:mayecw:n1770807

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