How underinvestment reduces underpricing

Marco Bade () and Hans Hirth
Additional contact information
Marco Bade: ICN Business School, CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine
Hans Hirth: TUB - Technical University of Berlin / Technische Universität Berlin

Post-Print from HAL

Abstract: Abstract We develop an economic model demonstrating that firms can benefit from committing to underinvestment. The model considers a firm's IPO, secondary‐market trading and subsequent investment decision. We analyse the conditions under which underinvestment can paradoxically be advantageous despite reducing the fundamental value of the firm. The benefit of committing to underinvest post‐IPO is expressed in reduced underpricing and thus a higher valuation during the IPO. We furthermore show that the firm may commit to an inefficient investment policy by appointing a manager with biased expectations or risk aversion. Our findings imply that, under certain conditions, firms are better off relying on biased managers when their initial outlook is poor, but risk‐averse managers when their initial outlook is good.

Date: 2024-04-29
References: Add references at CitEc
Citations:

Published in International Journal of Finance and Economics, 2024, ⟨10.1002/ijfe.2987⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:hal:journl:hal-04578776

DOI: 10.1002/ijfe.2987

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().