Header

UZH-Logo

Maintenance Infos

How syndicate short sales affect the informational efficiency of IPO prices and underpricing


Bartling, Björn; Park, Andreas (2010). How syndicate short sales affect the informational efficiency of IPO prices and underpricing. Journal of Financial and Quantitative Analysis, 45(2):441-471.

Abstract

When a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment option. This option is a standard feature of initial public offering (IPO) arrangements that allows the underwriter to purchase more shares from the issuer at the original offer price. We propose a theoretical model to study the implications of this combination of short position and overallotment option on the pricing of the IPO. Maximizing the sum of both the profits from their share of the offer revenue and the potential profits from aftermarket trading, we show that underwriters strategically distort the offer price. This results either in exacerbated underpricing when favorably informed underwriters lower prices to secure a signaling benefit, or in informationally inefficient offer prices when underwriters pool in offer prices irrespective of their information.

Abstract

When a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment option. This option is a standard feature of initial public offering (IPO) arrangements that allows the underwriter to purchase more shares from the issuer at the original offer price. We propose a theoretical model to study the implications of this combination of short position and overallotment option on the pricing of the IPO. Maximizing the sum of both the profits from their share of the offer revenue and the potential profits from aftermarket trading, we show that underwriters strategically distort the offer price. This results either in exacerbated underpricing when favorably informed underwriters lower prices to secure a signaling benefit, or in informationally inefficient offer prices when underwriters pool in offer prices irrespective of their information.

Statistics

Citations

1 citation in Web of Science®
1 citation in Scopus®
Google Scholar™

Altmetrics

Downloads

56 downloads since deposited on 02 Nov 2010
10 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2010
Deposited On:02 Nov 2010 14:07
Last Modified:08 Apr 2017 07:21
Publisher:Cambridge University Press
ISSN:0022-1090
Publisher DOI:https://doi.org/10.1017/S0022109010000128

Download

Preview Icon on Download
Preview
Content: Accepted Version
Filetype: PDF
Size: 1MB
View at publisher