Abstract

References (21)

Beta

One-Click Download | Share | Email | Add to Briefcase

An Asymmetric Payoff-Based Explanation of IPO 'Underpricing'

Atanu Saha
Compass Lexecon, New York

Allen Ferrell
Harvard Law School; European Corporate Governance Institute (ECGI)

June 1, 2007

Harvard Law and Economics Discussion Paper No. 587

Abstract:
The widely studied phenomenon of underpricing of new issues of common stock can be explained by underwriters' payoff asymmetry. Under uncertain investors' demand for a new issue, the underwriter's downside risk if he overestimates demand can be significantly larger than the upside potential when he underestimates demand. To protect himself from the large downside risk of overestimating demand, the underwriter rationally chooses a lower offer price than he would have in the absence of demand uncertainty.

Keywords: ipo underpricing, underwriter, IPO, uncertainty

JEL Classifications: D82, G24, G32, K22

Working Paper Series

Date posted: August 17, 2007 ; Last revised: November 04, 2008

Suggested Citation

Saha, Atanu and Ferrell, Allen, An Asymmetric Payoff-Based Explanation of IPO 'Underpricing' (June 1, 2007). Harvard Law and Economics Discussion Paper No. 587. Available at SSRN: http://ssrn.com/abstract=991917

Export to: Export Citation What's this?

Contact Information

Allen Ferrell (Contact Author) Harvard Law School ( email ) Griswold 303 1525 Massachusetts Avenue Cambridge, MA 02138 United States (617) 495-8961 (Phone) (617) 495-1110 (Fax)
European Corporate Governance Institute (ECGI) c/o ECARES ULB CP 114 B-1050 Brussels Belgium HOME PAGE: http://www.ecgi.org
Atanu Saha Compass Lexecon, New York ( email ) New York, NY United States

Abstract

References (21)

Date posted: August 17, 2007 ; Last revised: November 04, 2008

Suggested Citation

Contact Information

Allen Ferrell (Contact Author)

Atanu Saha