Signalling in the Internet Craze of Initial Public Offerings

Melanie Cao () and Shouyong Shi

Working Papers from University of Toronto, Department of Economics

Abstract: In this paper we analyze the clustering phenomenon of underpricing in initial public offerings (IPOs), where firms in a particular industry choose to issue their new shares at the same time and at great discounts. The industry consists of many firms that have private in-formation about their own qualities (high or low) and that must raise external capital first before production. In the product market, firms compete through quality ladders, where each high-quality firm monopolizes the production of a particular variety of product. We show that self-fulfilling multiple equilibria arise. In one, no firm underprices the IPO. In the other, all high-quality firms underprice their IPOs, resulting in clustering. Moreover, the clustering is more likely to occur in economic upturns than in downturns, and in an easy credit market than in a tight market.

Keywords: Initial public offerings; Signalling; Clustering; Multiple equilibria. (search for similar items in EconPapers)
JEL-codes: D82 E44 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2002-07-11
New Economics Papers: this item is included in nep-dge, nep-ent and nep-rmg
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Related works:
Journal Article: Signaling in the Internet craze of initial public offerings (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:tor:tecipa:shouyong-02-03

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