argue that issuers are less concerned about underpricing when offer prices are revised upwards, since their personal wealth has also increased, due to a higher value of their retained shares. Therefore, they reduce their monitoring behavior, thus allowing underwriters to underprice more. Loughran and Ritter (2002) state that underwriters might leave substantial amounts of money on the table to benefit some investors. Investors who receive allocations of underpriced shares reward investment banks with business such as trading commissions, SEOs and subsequent IPOs. In Baron’s model (Baron, 1982), issuers face a tradeoff between underpricing and monitoring the underwriter. Underwriters use promotional efforts to create demand for the IPO, but these efforts are costly for a bank. In order to make sure that the investment bank puts in the right amount of effort in marketing the shares, the issuer monitors the underwriter. Because this monitoring is costly, the issuer may allow some underpricing. Other explanations of IPO underpricing include the lawsuit avoidance hypothesis and the incentive investment bankers get from post IPO trading profits.Table 1 gives an overview of the literature review. 2001 Ljungqvist, Habib 1995 Wilhelm, Hanley 1990 Manaster, Carter 1986 Ritter, Beatty Rock, Author 1986 & & & & Information incentives Curse/Realignment Winner’s underpricing compensated investors uninformed Winner’s underpricing compensated investors uninformed Winner’s underpricing compensated investors uninformed Winner’s underpricing compensated investors Uninformed Winner’s Theory Table asymmetry: need Curse, need Curse, need Curse, need Curse: 1: IPO with with with with to to to to be be be be underpricing of Investors to Firms in investors Institutional underwriters by Firms lose underprice Underwriters related Underpricing Relation underpriced reduce selecting market promote signal are to theories receive the risk too less prestigious firm share (informed) is that need shares the much positively informed quality more issue for or underpricing allocations too little
argue that issuers are less concerned about underpricing when offer prices are revised upwards, since their personal wealth has also increased, due to a higher value of their retained shares. Therefore, they reduce their monitoring behavior, thus allowing underwriters to underprice more. Loughran and Ritter (2002) state that underwriters might leave substantial amounts of money on the table to benefit some investors. Investors who receive allocations of underpriced shares reward investment banks with business such as trading commissions, SEOs and subsequent IPOs. In Baron’s model (Baron, 1982), issuers face a tradeoff between underpricing and monitoring the underwriter. Underwriters use promotional efforts to create demand for the IPO, but these efforts are costly for a bank. In order to make sure that the investment bank puts in the right amount of effort in marketing the shares, the issuer monitors the underwriter. Because this monitoring is costly, the issuer may allow some underpricing. Other explanations of IPO underpricing include the lawsuit avoidance hypothesis and the incentive investment bankers get from post IPO trading profits.Table 1 gives an overview of the literature review. Habib & Ljungqvist, 2001 Hanley & Wilhelm, 1995 Carter & Manaster, 1990 Beatty & Ritter, 1986 Rock, 1986 Author Information asymmetry: Investors are less informed Table 1: IPO underpricing theories Winner’s Curse/Realignment of incentives Winner’s Curse, uninformed investors need to be compensated with underpricing Winner’s Curse, uninformed investors need to be compensated with underpricing Winner’s Curse, uninformed investors need to be compensated with underpricing Winner’s Curse: Uninformed investors need to be compensated with underpricing Theory Firms promote the issue to reduce the need for underpricing Institutional (informed) investors receive more allocations in underpriced shares Firms signal firm quality by selecting prestigious underwriters Underwriters that underprice too much or too little lose market share Underpricing is positively related to risk Relation