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Underpricing and entrepreneurial wealth losses in IPOs: theory and evidence


Habib, Michel; Ljungqvist, Alexander P (2001). Underpricing and entrepreneurial wealth losses in IPOs: theory and evidence. Review of Financial Studies, 14(2):433-458.

Abstract

We model owners as solving a multidimensional problem when taking their firms public. Owners can affect the level of underpricing through the choices they make in promoting an issue, such as which underwriter to hire or on what exchange to list. The benefits of reducing underpricing in this way depend on the owners’ participation in the offering and the magnitude of the dilution they suffer on retained shares. We argue that the extent to which owners trade off underpricing and promotion is determined by the minimization of their wealth losses. Evidence from a sample of U.S. initial public offering confirms our empirical predictions.

Abstract

We model owners as solving a multidimensional problem when taking their firms public. Owners can affect the level of underpricing through the choices they make in promoting an issue, such as which underwriter to hire or on what exchange to list. The benefits of reducing underpricing in this way depend on the owners’ participation in the offering and the magnitude of the dilution they suffer on retained shares. We argue that the extent to which owners trade off underpricing and promotion is determined by the minimization of their wealth losses. Evidence from a sample of U.S. initial public offering confirms our empirical predictions.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scopus Subject Areas:Social Sciences & Humanities > Accounting
Social Sciences & Humanities > Finance
Social Sciences & Humanities > Economics and Econometrics
Language:English
Date:1 April 2001
Deposited On:14 Aug 2020 15:12
Last Modified:17 Sep 2020 11:23
Publisher:Oxford University Press
ISSN:0893-9454
OA Status:Closed
Publisher DOI:https://doi.org/10.1093/rfs/14.2.433
Related URLs:https://academic.oup.com/rfs/article-abstract/14/2/433/1601769 (Publisher)
https://www.zora.uzh.ch/id/eprint/189115/
Other Identification Number:merlin-id:19638

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