Abstract
Suggests a model to explain underpricing at the IPO by high-quality firms as a signal to investors at the expense of low-quality firms. In contrast to Rock's (1986) equilibrium model suggesting firms underprice reluctantly, this model follows in the vein of more recent models (Nanda 1989 and Grinblatt & Hwang 1989), suggesting that high-quality firms underprice strategically as a signaling device. Consequently, low-quality firms are forced to either invest in substantial imitation expenses or reveal their quality. Using data from a sample of 1,028 IPO firms from 1977-1982 in Going Public: The IPO Reporter, empirical evidence shows that IPO firms reissue substantially, and moreover that they choose a timing for seasoned offerings (SO) that is related to the IPO. The model implies that firms are eventually compensated for low IPO prices by a higher price at a seasoned offering. High-quality firm owners are able to achieve higher SO prices because their marginal cost of underpricing is less than that incurred by low-quality firms attempting to imitate high-quality firms. Ultimately, strategic underpricing at the IPO is possible because of an information asymmetry between firm owners and investors. (CJC)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.