Litigation Risk, Intermediation, and the Underpricing of Initial Public Offerings

Patricia J Hughes and Anjan Thakor ()

The Review of Financial Studies, 1992, vol. 5, issue 4, 709-42

Abstract: We formally examine the role of litigation risk in initial public offering (IPO) pricing. The underwriter's pricing decision trades off current revenue against expected future litigation costs, both of which are increasing in the IPO price. Given a time-consistency constraint and rational expectations on the part of investors, however, the "standard" litigation risk argument does not lead to equilibrium underpricing. We develop a richer model that provides sufficient conditions under which there is equilibrium underpricing. The issuer's choice of employing an underwriter versus floating the IPO on its own is examined, and various testable implications of the model are developed. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1992
References: Add references at CitEc
Citations: View citations in EconPapers (66)

Downloads: (external link)
http://www.jstor.org/fcgi-bin/jstor/listjournal.fcg/08939454 full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:5:y:1992:i:4:p:709-42

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().