Behavioral Characteristics of IPO Underpricing

Allen Michel, Jacob Oded and Israel Shaked

Chapter 8 in Behavioral Finance:A Novel Approach, 2020, pp 179-207 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Earlier studies document positive first-day return for initial public offerings (IPOs), commonly interpreted as underpricing of the issue. The empirical evidence also indicates that IPO underpricing is negatively related to the public float (the fraction of the firm sold to the public). One possible explanation for this relation is that firms allocate a fixed amount of money for underpricing, and set an issue price accordingly — a behavioral characteristic. But, if indeed firms allocate a fixed amount of money to underpricing, then this underpricing should diminish in the public float. Using a sample of IPOs between 1996 and 2008, we provide empirical evidence that indeed the relation between underpricing and the public float is non-linear. Specifically, the higher the public float, the less the decrease of underpricing in the public float. Moreover, in our regression analysis, regressing underpricing on the reciprocal of the public float provides the best fit. As we show, this result is consistent with firms allocating a fixed amount of money for underpricing. This finding is important because it helps predict underpricing and has implications for firms, investors and regulators.

Keywords: Analysts Recommendations; Behavioral Biases; Behavioral Economics; Behavioral Finance; Board of Directors; Compensation; Compensation Committee; Control; Coronavirus; Corporate Governance; COVID-19; Decision Making; Disposition Effect; Earnings Management; Elections; Emotions; Financial Crises; Financial Market Anomalies; Financial Markets; Forecast-Accuracy; Gender Differences; Heuristics; Interval Forecasting; Investment; Investor Horizon; Investors' Beliefs; IPO Under-Pricing; Life Expectancy; Myopia; Overconfidence; Pensions Industry; Policy Reforms; Polls; Portfolio Risk; Prediction Markets; Regulation; Stock Price Drifts; Time Preferences (search for similar items in EconPapers)
JEL-codes: G3 G30 G4 G41 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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