The Pricing of IPO Services and Issues: Theory and Estimation
University of Texas-Austin
Ari Choi Kang
University of Texas at Austin - Department of Finance
October 12, 2011
AFA 2013 San Diego Meetings Paper
By modeling the market for IPOs as a repeated game with imperfect monitoring, we establish that collusion among underwriters explains the concentration of spreads at 7%, along with other characters of the data on spreads. Furthermore, the structure of optimal spreads in the model explains the existence and quantitative characteristics of underpricing in the market for IPO shares. We estimate the model by deriving moment conditions from both underpricing and spreads. Our estimates indicate that IPOs destroy value on average over the sample period 1985-2007. This result, however, is driven primarily by the dot-com era. Excluding this period, IPOs appear to increase value.
Number of Pages in PDF File: 52
Keywords: IPOs, underpricing
Date posted: October 12, 2011 ; Last revised: March 17, 2012
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