Incentives to underprice

Graeme Camp, Aimee Comer and Janice C. Y. How

Accounting and Finance, 2006, vol. 46, issue 4, 537-551

Abstract: In an initial public offering, the choices made by issuers, such as the offer price, might not appear to be wealth maximizing. In this article, we argue that the choices are strategic. Based on the model developed by Barry (1989), we show that the average change in the issuer's wealth (4.52 per cent) is lower than the average loss implied by underpricing (12.09 per cent). Our results support the notion that the choices issuers make at the offering generate a compensatory benefit in the aftermarket. That the issuer may well not suffer a net wealth loss from the offering is in accordance with continued initial public offering activity.

Date: 2006
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