Belief-Based IPO Underpricing

Abstract

We consider IPO issuances as multi-units auctions, where privately informed bidders are risk-averse. At the optimal IPO and fixed-price auctions, we show that when individual beliefs about the valuation of the shares increase in the sense of either first-order or second order stochastic dominance, the equilibrium price decreases. For Walrasian auctions (or book-building IPOs), this result is not true in general and underpricing may occur because of collusion.