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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 Series

Date posted: May 10, 2001 ; Last revised: May 10, 2001

Suggested Citation

Ljungqvist, Alexander and Habib, Michel A., Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence (February 2000). Available at SSRN: http://ssrn.com/abstract=263810 or doi:10.2139/ssrn.263810

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Contact Information

Alexander Ljungqvist (Contact Author) New York University - Department of Finance ( email ) Stern School of Business 44 West 4th Street, Suite 9-160 New York, NY 10012-1126 United States 212-998-0304 (Phone) 212-995-4220 (Fax) HOME PAGE: http://pages.stern.nyu.edu/~aljungqv
Centre for Economic Policy Research (CEPR) 90-98 Goswell Road London EC1V 7RR United Kingdom
European Corporate Governance Institute (ECGI) c/o ECARES ULB CP 114 B-1050 Brussels Belgium
Michel A. Habib University of Zurich ( email ) Plattenstrasse 14 Zurich 8032 Switzerland 41-44-634-2507 (Phone) 41-44-634-4903 (Fax) HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm
Swiss Finance Institute ( email ) c/o University of Geneve 40, Bd du Pont-d'Arve 1211 Geneva CH-6900 Switzerland