Publicity and the Clustering of IPO Underpricing

Melanie Cao () and Shouyong Shi ()

No 990, Working Papers from Queen's University, Department of Economics

Abstract: We explain why underpricing in IPOs can be large in magnitude and clustered, using a signalling model where firms have private information about their qualities (high or low). A novel feature is that a firm, if perceived by the market as high quality, benefits from the industry's publicity which is an increasing function of the amount of IPO underpricing by all high-quality firms in the industry. Despite the potential free-rider problem created by the industry's publicity, we show that a high-quality firm chooses to underprice its own IPO as the best response to other high-quality firms' underpricing. Thus, IPO underpricing is clustered.

Keywords: Initial public offering; Signalling; Externality; Multiple equilibria (search for similar items in EconPapers)
JEL-codes: G30 D82 (search for similar items in EconPapers)
Date: 1999-07
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Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:990

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