of the demand for investment banking advising and distribution services for “A model new presents an interesting model to explain IPO underpricing. issues” (Baron, 1982) Baron theorizes that the investment banker is better informed about capital market conditions and demand for the new issue. Such asymmetry often leads to “adverse selection and moral hazard Baron ultimately concludes that IPO offer problems.” (p.955) prices are lower than the levels that would be seen in the absence of asymmetric information. Years later Muscarella and Vetsuypens (1989) evaluated model in Baron’s their paper, simple test of model of at 38 investment “A Baron’s underpricing”. Looking banks that completed IPOs and participated in the distribution from 1970-1987, issue’s they observed significant underpricing of about 7 percent on the first day of “statistically (p.135) In fact, underpricing was greatest in cases where the bank had a trading.” dominant impact on pricing its own stock. The authors thus conclude that model Baron’s does not hold and instead, that is a pervasive phenomenon that cannot be “underpricing explained solely by information asymmetries between issuers and (p.135) underwriters.” One of the leading economists currently interested in the study of the IPO market is Professor Jay Ritter of the University of Florida. In in the IPO his “Equilibrium (2011) paper, Ritter addressed the underpricing of IPOs and the decrease in total market” volume since the end of the technology bubble in 2000. While part of the decrease is attributable to regulatory hurdles, he argues that there has been a structural change in the equilibrium of the IPO market. One of the main problems with the state of the market is that underwriters consistently underprice. However, listing companies seem content with allowing this practice, as the underwriters have developed somewhat of an “oligopoly due to the fact that there are a limited number of underwriters with power” (p.28)
“A model of the demand for investment banking advising and distribution services for new issues” (Baron, 1982) presents an interesting model to explain IPO underpricing. Baron theorizes that the investment banker is better informed about capital market conditions and demand for the new issue. Such asymmetry often leads to “adverse selection and moral hazard problems.” (p.955) Baron ultimately concludes that IPO offer prices are lower than the levels that would be seen in the absence of asymmetric information. Years later Muscarella and Vetsuypens (1989) evaluated Baron’s model in their paper, “A simple test of Baron’s model of underpricing”. Looking at 38 investment banks that completed IPOs and participated in the issue’s distribution from 1970-1987, they observed “statistically significant underpricing of about 7 percent on the first day of trading.” (p.135) In fact, underpricing was greatest in cases where the bank had a dominant impact on pricing its own stock. The authors thus conclude that Baron’s model does not hold and instead, that “underpricing is a pervasive phenomenon that cannot be explained solely by information asymmetries between issuers and underwriters.” (p.135) One of the leading economists currently interested in the study of the IPO market is Professor Jay Ritter of the University of Florida. In his “Equilibrium in the IPO market” (2011) paper, Ritter addressed the underpricing of IPOs and the decrease in total volume since the end of the technology bubble in 2000. While part of the decrease is attributable to regulatory hurdles, he argues that there has been a structural change in the equilibrium of the IPO market. One of the main problems with the state of the market is that underwriters consistently underprice. However, listing companies seem content with allowing this practice, as the underwriters have developed somewhat of an “oligopoly power” (p.28) due to the fact that there are a limited number of underwriters with