The Relation between IPO Underpricing and Litigation Risk Revisited: Changes between 1990 and 2002

Yun (Ellen) Zhu

Financial Management, 2009, vol. 38, issue 2, 323-355

Abstract: This paper reexamines the litigation risk hypothesis of initial public offering (IPO) underpricing in different legal and economic environments. When litigation risk is reduced in the three‐year period after the enactment of the Private Securities Litigation Reform Act of 1995, firms' litigation risk plays a less significant role in IPO underpricing strategy. Furthermore, underpricing deters more traditional IPO lawsuits compared to that effect in the pre‐1995 period. In the period after that, however, there is another structural change in which firms again use underpricing as insurance against IPO lawsuits. This underpricing may actually have led to greater litigation relating to IPO allocation irregularities.

Date: 2009
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