Handbook of Corporate Finance Empirical Corporate Finance Volume 1

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Chapter 7 IPO UNDERPRICING* ALEXANDER LJUNGQVIST^1 Leonard N. Stern School of Business, New York University, 44 West 4th Street, ...

376 A. Ljungqvist 5.2. Underpricing as a means to reduce agency costs 411 Behavioral explanations 412 6.1. Cascades 412 6.1.1. ...

Ch. 7: IPO Underpricing 377 Keywords initial public offerings, underpricing, investment banks, asymmetric information, behaviora ...

378 A. Ljungqvist Introduction Going public marks an important watershed in the life of a young company. It provides access to ...

Ch. 7: IPO Underpricing 379 in which underpricing is used to induce optimal selling effort.Welch (1989)and others assume that th ...

380 A. Ljungqvist indications of interest, which are recorded in a ‘book’, and the state of the market, the investment bank prop ...

Ch. 7: IPO Underpricing 381 Within the available space, it is impossible to do justice to all theoretical and em- pirical contri ...

382 A. Ljungqvist Fig. 1. Initial IPO returns in the United States, 1960 to 2003. The figure reports quarterly equal-weighted av ...

Ch. 7: IPO Underpricing 383 Fig. 2. Initial IPO returns in Europe, 1990 to 2003. The figure reports equal-weighted average initi ...

384 A. Ljungqvist Fig. 3. Initial IPO returns in Asia-Pacific and Latin America, 1990 to 2001. The figure reports equal-weighted ...

Ch. 7: IPO Underpricing 385 allocation is below the simple average underpricing return shown in Section2.Inthe extreme case, the ...

386 A. Ljungqvist At the heart of the winner’s curse model is the idea that, if properly adjusted for rationing, uninformed inve ...

Ch. 7: IPO Underpricing 387 winner’s curse disappears and with it the reason to underprice. By focusing on a seg- ment of the IP ...

388 A. Ljungqvist might be to identify specific uses or risk factors that, if present, indicate higher un- certainty.Ljungqvist ...

Ch. 7: IPO Underpricing 389 instance, if reputation capital is valuable, prestigious banks will refrain from underwrit- ing low- ...

390 A. Ljungqvist However, in the absence of inducements, revealing positive information to the under- writer is not incentive-c ...

Ch. 7: IPO Underpricing 391 A second advantage of repeated interaction is that is allows underwriters to ‘bundle’ offerings acro ...

392 A. Ljungqvist prediction,James and Wier (1990)find that companies that have secured lines of credit before their IPOs (and t ...

Ch. 7: IPO Underpricing 393 Cornelli and Goldreich (2001, 2003)have access to the IPO books of a leading Euro- pean investment b ...