Strategic underpricing in public offerings: The role of firm quality

Amrit Panda () and Soumya Guha Deb ()
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Amrit Panda: O.P. Jindal Global University
Soumya Guha Deb: Indian Institute of Management Sambalpur

Journal of Economics and Finance, 2024, vol. 48, issue 4, No 6, 1078-1096

Abstract: Abstract In the presence of asymmetric information between insiders and outsiders of the firm, the actions of the managers, such as underpricing, may signal the prospects of the firms. Using an extensive dataset encompassing over 6,200 Initial Public Offerings (IPOs) and (Seasoned Equity Offerings) SEOs instances from 2001 to 2021 across 11 countries, the study shows that underpricing diminishes with each subsequent SEO round, with high-quality (HQ) firms experiencing this decline more rapidly compared to low-quality (LQ) firms. Our analysis, incorporating six dimensions of firm quality identifying the profitability, operational efficiency, financial health, and earnings quality of the firm, suggests a strategic underpricing of IPOs by particularly HQ firms to offset initial losses in future SEOs. The consistency of these results is affirmed through rigorous robustness checks. This research adds a fresh empirical perspective to the IPO and SEO discourse, offering valuable insights that can guide investors, issuers, regulatory bodies, and market observers in making more informed, strategic decisions.

Keywords: IPO; SEO; Firm Quality; Underpricing; Information Asymmetry (search for similar items in EconPapers)
JEL-codes: D82 G32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s12197-024-09686-7

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