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he original price range (higher demand let to upward offer price revision), the underpricing is still significantly above average
The compensation necessary to induce investors to reveal high demand

Role of Underwriter
When underwriter is informed
Costly to monitor underwriter
Underpricing acts to incentive underwriter
But – underpricing is same for underwriter IPOs
Underpricing substitutes for marketing expenditure
But underpricing extreme during internet bubble – when marketing costs low

Cascading Demand
Learn a lot from how “excited” other investors are about the IPO
Investors follow one another
IPO success depends on whether the investor herd is stampeding
Ensure success by creating “enthusiasm

Share Allocation

Future wealth
Underpricing allowed because information gained about increase in post issue value
Ownership structure
Institutional investors are more informed and preferred – receive preferential allocation – monitoring role
Seek blockholders for defensive and monitoring reasons
Disperse shareholding entrenches mangement

Empirical Support
Information asymmetry
Underpricing is lower for IPOs:
Where the firm provides more publicly available information
With high reputation underwriters
Winner’s curse
Informed investors preferentially received higher allocation
Receive higher allocation of hot issues
Information acquisition
When offer price exceeds the original price range the underpricing is still significantly above average
Information cascades
IPOs either undersubscribed or hugely oversubscribe no in-between

 

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