Handbook of Corporate Finance Empirical Corporate Finance Volume 1

Chapter 7

IPO UNDERPRICING*

ALEXANDER LJUNGQVIST^1
Leonard N. Stern School of Business, New York University, 44 West 4th Street, Suite 9-160, New York,
NY 10012, USA
e-mail:[email protected]

Contents

Abstract 376
Keywords 377

1. Introduction 378


2. Evidence of underpricing 381


3. Asymmetric information models 384
   3.1. The winner’s curse 384
   3.1.1. Testable implications and evidence 385
   3.2. Information revelation theories 389
   3.2.1. Extensions 391
   3.2.2. Testable implications and evidence 392
   3.3. Principal-agent models 396
   3.3.1. Testable implications and evidence 398
   3.4. Underpricing as a signal of firm quality 400
   3.4.1. Testable implications and evidence 401


4. Institutional explanations 402
   4.1. Legal liability 402
   4.1.1. Testable implications and evidence 403
   4.2. Price stabilization 405
   4.2.1. How widespread is price support? 406
   4.2.2. Testable implications and evidence 407
   4.3. Tax arguments 408


5. Ownership and control 408
   5.1. Underpricing as a means to retain control 409
   5.1.1. Testable implications and evidence 409

*Thanks for helpful comments go to Martijn Cremers, Espen Eckbo, Roger Edelen, David Goldreich, Tim
Jenkinson, Ron Masulis, Jay Ritter, Ann Sherman, Seha Tinic, and William J. Wilhelm.

(^1) Address for correspondence: Stern School of Business, New York University, Suite 9-160, 44 West Fourth
Street, New York, NY 10012-1126. Phone 212-998-0304. Fax 212-995-4220.
Handbook of Corporate Finance, Volume 1
Edited by B. Espen Eckbo
Copyright©2007 Elsevier B.V. All rights reserved
DOI: 10.1016/S1873-1503(06)01007-5