The Pricing of Initial Public Offerings: An Option Approach

Sheen Liu, Chunchi Wu and Peter Huaiyu Chen
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Sheen Liu: Washington State University-Vancouver, USA
Chunchi Wu: Singapore Management University, Singapore
Peter Huaiyu Chen: Youngstown State University, USA

Chapter 7 in Advances in Quantitative Analysis of Finance and Accounting, 2008, pp 127-141 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis chapter proposes a theoretical model of initial public offering by taking into account the uncertainty in security pricing and the underwriting process. Three major factors are shown to affect the IPO pricing: (1) the uncertainty of stock price, (2) the legal requirement that restricts underwriters from selling any part of the issue above the fixed offering price, and (3) the underwriters' risk tolerance. It is shown that underpricing is negatively related to the underwriter's risk tolerance, and positively related to the length of premarket period and market price volatility.

Keywords: Hedging Strategies; Expense Mismatching; Stock Split; Trading Volume; Portfolio Optimization; Intraday Patterns; Earnings Management; International Winner-Loser Effect (search for similar items in EconPapers)
JEL-codes: G2 G3 (search for similar items in EconPapers)
Date: 2008
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