 Initial uncertainty and the risk of setting a fixed-offer price: Implications for the pricing of bookbuilt and best-efforts IPOsSteven L. Jones and John C. Yeoman Journal of Corporate Finance, 2014, vol. 27, issue C, 194-215 Abstract: We model the risk of setting the required fixed-offer price in an IPO given initial uncertainty about value, as well as costs of over and underpricing. Assuming that the goal of issuers in bookbuilt IPOs is to maximize net offering proceeds, our analysis indicates that their optimal strategy is to negotiate a relatively small spread, consistent with material underpricing. Similarly, considering the expected costs of overpricing makes the underpricing of best-efforts IPOs in the interest of issuers. Our results rely on neither asymmetric information nor agency costs and provide support for Hansen's (2001) nearly-optimal “conventional” spread and the view that it evolved from adaptive, imitative behavior, consistent with Alchian's (1950) explanation of how economic players evolve practices to survive under uncertainty and incomplete information, as well as Alchian's (1969) work on how fixed prices and queues can efficiently clear product markets. Keywords: Armen Alchian; Initial public offering; Underpricing; Investment banking (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:27:y:2014:i:c:p:194-215 DOI: 10.1016/j.jcorpfin.2014.05.006 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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