Public information and IPO underpricing

Einar Bakke (), Tore E. Leite () and Karin Thorburn ()
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Tore E. Leite: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway, http://www.nhh.no/Default.aspx?ID=2020

No 2010/6, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: We analyze the effect of public information on rational investors' incentives to reveal private information during the bookbuilding process and their demand for allocations in the IPO. Our model generates several new predictions. First, investors require more underpricing to truthfully reveal positive private information in bear markets than in bull markets (the incentive effect). Second, the fraction of positive private signals and of underpriced IPOs is increasing in market returns (the demand effect). Combined, these two effects can explain why IPO underpricing is positively related to pre-issue market returns, consistent with extant evidence. Using a sample of 5,000 U.S. IPOs from 1981-2008, we show that the empirical implications of the model are borne out in the data.

Keywords: Public information; partial adjustment; underpricing; IPOs; bookbuilding (search for similar items in EconPapers)
JEL-codes: G10 G32 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2010-08-24
New Economics Papers: this item is included in nep-cta and nep-ict
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