insider Underpricing positively promotion Underpricing allocations underpricing Positive related Underwriter related negative) Residual firm Risk Underpricing Testable proxies age, selling to to relation underpricing implications IPO related is underpricing underwriter costs. negatively are, reputation and size, is is is negatively negatively positively between firm Promotion institutional to etc. the size, (Both market is size related negatively related related positive of costs share the to to to are IPO. risk. and Habib Chowdry 1989; Aggarwal, Hanley Michealy 2004 Loughran Dunbar, Beatty Loughran Michealy Beatty Supporting (in Amihud & Ritter, Ritter, & 2000 Ljungqvist, 1980’s); & Wilhelm, & & and & 2002; Sherman, Shaw, Shaw, evidence Ritter, 1986; 1986; Ritter, et Koh al., 1994 1994; 2004 1995; 2001 2003; & 1996 Walter, more informed by. allocations Lee choice Wilhelm, the the Loughran prohibit 2005, for severe Ruud Criticism No underpricing; sign 1990’s et underpriced 1993, short al. evidence is to flipped; price endogenous 1999, 2003: investors be and and is selling underpricing compensation hard Ritter, correction. bubble data Underwriter that Ljunqvist Derrien to shares constraints request on 2004: come period, is & in to 2002 Ritter, Loughran Spindt, Benveniste Author Welch, Ritter, et Bikhchandani Author al., Information 1992; 1998 1989 1989 & & Prospect allocations underpricing rewarded information investors from solicit use underwriters Book Theory good underprice firms Signalling Bandwagon Theory asymmetry: Book investors, Building, firm deliberately information Theory issuers who Building hypothesis: with quality to Table hypothesis are and signal provide Investors and to 1 Continued underwriters revised underpricing Issuers extracting underwriters more light. favorable adjust Underwriters Relation subsequent more, Firms oversubscribed IPOs Relation have are Informed allocations. that prices are are superior upwards either information more information are less SEOs when upwards are do underpriced investors extremely concerned or likely not better information Prestigious undersubscribed prices fully to when comes at issue receive are about to to
Underpricing is negatively related to promotion costs. Promotion costs are positively related to the size of the IPO. Underpricing is negatively related to insider selling Positive relation between underpricing and institutional allocations Underwriter reputation is negatively related to underpricing Residual underpricing (Both positive and negative) is negatively related to underwriter market share Underpricing is positively related to risk. Risk proxies are, firm size, firm age, IPO size, etc. Testable implications Habib & Ljungqvist, 2001 Hanley & Wilhelm, 1995; Aggarwal, 2002; Koh & Walter, 1989; Amihud et al., 2003; Chowdry & Sherman, 1996 Loughran and Ritter, 2004 (in 1980’s); Michealy & Shaw, 1994 Beatty Ritter, 1986; Dunbar, 2000 Beatty Ritter, 1986; Michealy & Shaw, 1994; Loughran & Ritter, 2004 Supporting evidence Lee et al. 1999, data on allocations is hard to come by. No evidence that informed investors request more underpriced shares Loughran and Ritter, 2004: in the 1990’s and bubble period, the sign flipped; Ljunqvist & Wilhelm, 2003: Underwriter choice is endogenous Ruud 1993, underpricing is to severe to be compensation for underpricing; Derrien 2005, short selling constraints prohibit price correction. Criticism Loughran & Ritter, 2002 Benveniste & Spindt, 1989 Author Information asymmetry: Investors have superior information to issuers and underwriters Welch, 1989 Bikhchandani et al., 1992; Ritter, 1998 Author Table 1 Continued Prospect Theory Book Building, underwriters use Book Building to solicit information from investors, investors who provide information are rewarded with underpricing and allocations Theory Signalling hypothesis: firms deliberately underprice to signal good firm quality Bandwagon hypothesis Theory Issuers are less concerned about underpricing when prices are revised upwards Underwriters do not fully adjust prices upwards when favorable information comes to light. Informed investors receive more allocations. Prestigious underwriters are better at extracting information Relation Firms that are underpriced more, are more likely to issue subsequent SEOs IPOs are either extremely oversubscribed or undersubscribed Relation