Information Collection and IPO Underpricing

Re-Jin Guo ()

Review of Quantitative Finance and Accounting, 2005, vol. 25, issue 1, 5-19

Abstract: This study provides new evidence that IPO underpricing is economic rents paid for investor to gather costly information. Subrahmanyam and Titman (1999) report that diverse investor information, once aggregated in the public market, could provide a more informative stock price and accurate feedback to firm’s investment decision. I investigate the hypothesis that IPO underpricing as economic rents could be higher, when investor information is diverse. In support of this hypothesis, I find a positive and significant correlation between the extent of underpricing and the information diversity measure proposed by Barron et al. (1998). There is a positive and significant correlation between this information diversity measure and an IPO firm’s subsequent (absolute) change in capital and R&D expenditures. In addition, firms with high information diversity measure and change in subsequent investment exhibit a better subsequent return performance than firms with low diversity and change in investment. This is consistent with the proposition that investor information serves as useful feedback for managers in the IPO market. Copyright Springer Science+Business Media, Inc. 2005

Keywords: IPO underpricing; information production; information diversity (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (10)

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DOI: 10.1007/s11156-005-3176-9

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