Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2010/6:
Public information and IPO underpricing
Einar Bakke ()
, Tore E. Leite ()
and Karin S. Thorburn ()
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; (follow links to similar papers)
JEL-Codes: G10; G32; (follow links to similar papers)
37 pages, August 24, 2010
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