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Underpricing and Entrepreneurial Wealth Losses in IPOs:
Theory and Evidence Alexander Ljungqvist New York University - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI) Michel A. Habib University of Zurich; Swiss Finance Institute February 2000 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 what exchange to list on. 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. IPOs confirms our empirical predictions.
JEL Classifications: G32 Working Paper SeriesDate posted: May 10, 2001 ; Last revised: May 10, 2001Suggested CitationContact Information
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