The Pricing of IPO Services and Issues: Theory and Estimation

Ari Kang and Richard Lowery

The Review of Corporate Finance Studies, 2014, vol. 2, issue 2, 188-234

Abstract: We estimate a model for the process for setting IPO spreads and offer prices. Weestablish that the partially rigid spread schedule observed for IPOs, where over 90% ofIPOs with proceeds between $20 and $80 million have a spread of 7%, can be rationalized asoptimal collusion. Optimal collusion creates a rationale for high underpricing, and we usedata on both spreads and underpricing to estimate structural parameters. Our estimatessuggest that firms benefit from holding IPOs but that idiosyncratic manager preferencesmay drive much of the IPO market. Much of the money left on the table is estimated toaccrue to underwriters.

JEL-codes: D43 G24 L13 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:rcorpf:v:2:y:2014:i:2:p:188-234.

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