Clustering of initial public offerings, information revelation and underpricing

Ulrike Hoffmann-Burchardi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: By providing an analysis of sequential going-public decisions the paper outlines conditions under which "hot issue markets" arise, i.e. under which the likelihood of a second initial public offering increases after a first firm has gone public. Two effects can trigger the rise of hot issue markets in a setting with asymmetric and costly information about both firm quality and industry prospects. The risk-averse entrepreneur can be subject to risk-induced selling pressure because of uncertain industry prospects conveyed by a first IPO in the industry. Also, investors can free-ride on the industry news, and increase their valuation for a second firm by abstaining from further costly information production. Finally, the model offers an explanation for the empirical finding that hot issue markets exhibit a higher degree of underpricing than cold issue markets.

Keywords: initial public offerings; asymmetric information; clustering; underpricing (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 1999-02-01
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Citations: View citations in EconPapers (1)

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