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Are IPOs “Overpriced?” Strategic Interactions between the Entrepreneur and the Underwriter

Kazunori Miwa, Satoshi Taguchi and Tatsushi Yamamoto
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Satoshi Taguchi: Doshisha University, Japan
Tatsushi Yamamoto: Osaka University, Japan

No DP2017-07, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: Two major problems are well-known in IPO research as “IPO puzzles.” First, a first listing price is much higher than the offering price set by the underwriter, which is called “underpricing.” Second, in the long-run the share price becomes much lower than the offering price, which is called “long-run underperformance.” A vast body of research explains why these IPO puzzles coexist.Assuming that investors' opinions diverge, we conclude that even the offering price is distorted through strategic interaction between the entrepreneur and the underwriter. Specifically, the offering price is already “overpriced.” Hence, the share price will drop substantially as information asymmetry between both the entrepreneur and the underwriter and investors is mitigated after the IPO, which delivers long-run underperformance. Our experiment supports these conclusions.

Keywords: IPO Puzzles; Earnings management; Experiment (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent
Date: 2017-03
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