Reducing Uncertainty Through a Two-Stage IPO

Abstract

We examine the effects on IPO uncertainty of an alternative going-public mechanism – the two-stage IPO, where a firm first gets quoted on the OTC market, and then upgrades to a national exchange where it first issues public equity. We find that a two-stage IPO firm experiences lower underpricing and return volatility than does a similar traditional IPO firm. We also find that uncertainty decreases significantly between the times of first OTC market quotation and upgrade. We show suggestive evidence that two-stage IPOs with greater disclosure during the first stage experience greater reduction in uncertainty. Our results are robust to controls for the potentially endogenous choice of a two-stage IPO.