Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence

Abstract

and the 1998 Wharton/Centre for Financial Studies Conference for helpful comments. We would also like to thank, especially, Bill Wilhelm for constant encouragement and support, and Kazunori Suzuki and Alessandro Sbuelz for excellent research assistance. We gratefully acknowledge financial support from the European Union under the Training and Mobility of Researchers grant no. ERBFMRXCT960054. Any remaining errors are our own.

IPO Pricing in the Dot-Com Bubble: Complacency or Incentives?

“…Consistent with the findings of Habib and Ljungqvist (2001), underpricing is inversely related to the participation ratio and the dilution factor (p<5% in most instances). In other words, underpricing is more severe when current shareholders have less at stake in the level of the offer price.…”

“…If firms with the most to learn during bookbuilding choose the top underwriters, the positive correlation between bank reputation and price revisions may not be causal but a byproduct of the selection behavior of such firms. We therefore estimate a 2SLS version of model [4] that explicitly treats underwriter choice as endogenous [see also Habib and Ljungqvist (2001)]. …”

IPO Allocations: Discriminatory or Discretionary?

“…We control for this effect by including the variable Proceeds, defined as the natural log of gross proceeds raised in the offering (converted into U.S. dollars using exchange rates on the pricing day). This variable too is endogenous if issuers aim to minimize wealth losses associated with their offerings (Habib and Ljungqvist, 2001), and will therefore be treated as endogenous in the estimation.…”

“…We treat IBmktshare as potentially endogenous, for it is possible that issuers choose their underwriters endogenously. Indeed, Habib and Ljungqvist (2001) show that treating underwriter choice as exogenous leads to the erroneous inference that more prestigious underwriters are associated with higher underpricing in the U.S. in the early 1990s. Again, we use the full country samples to derive these variables.…”

“…To a first approximation, maximizing the net proceeds of the offer (and thus the issuer's wealth) is equivalent to minimizing DollarUnderpricing. It is an approximation, for it ignores the dilution effect of selling new (primary) shares at a discount; for further details, see Habib and Ljungqvist (2001). Following the argument in Habib and Ljungqvist (2001), the optimum is characterized by the issuer and its banker having chosen their allocation policy such that informed investors are just compensated for the value of disclosing their private information.…”