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Price revisions are positively related to underpricing Price revisions are positively related to underpricing, institutional investors recieve more allocations, underwriter reputation is negatively related to underpricing Testable implications Underpricing is positively related to the probability of an SEO Not empirically tested Testable implications Loughran & Ritter, 2004; Hanley, 1993 Hanley, 1993; Ritter & Welch, 2002; Cornelli & Goldreich, 2001; Loughran and Ritter, 2004 (in 1980’s); Michealy & Shaw, 1994; Benveniste et al. 2002, 2003 Supporting evidence Jegadeesh et al., 1993 Amihud et al., 2003 Supporting evidence Loughran & Ritter, 2002: Prices are not revised upwards when positive public information comes to light (stock market rallies) Criticism Michaely & Shaw, 1994 Criticism Loughran & Ritter, 2004 Loughran & Ritter, 2004 Ljungqvist & Wilhelm, 2003 Baron, 1982 Author Information asymmetry: underwriters have superior information to issuers Table 1 Continued Analyst lust hypothesis Spinning hypothesis Realignment of incentives Underwriters have an incentive to underprice Theory Prestigious underwriters have star analysts, therefore issuers allow more underpricing Issuing decision makers invest in other underpriced IPOs to make a quick profit During the 90s insider stakes dropped, furthermore directed share programs emerged, reducing the cost of underpricing to decision makers Underpricing is a substitute for promotion activities Relation