Bigger Pie, Bigger Slice: Liquidity Value and IPO Underpricing
59 Pages Posted: 11 Dec 2018 Last revised: 3 Aug 2022
Date Written: June 24, 2019
Abstract
Initial public offerings (IPOs) transform private firms into publicly traded ones, thereby
improving liquidity of their shares. Better liquidity increases firm value, which we call
"liquidity value". We use a simple model and hypothesize that issuers and IPO in-
vestors bargain over the liquidity value, resulting in a discounted offer price, i.e., IPO
underpricing. We find supporting evidence that underpricing is positively related to the
expected post-IPO liquidity of the issuer, controlling for firm and deal characteristics
and market conditions. We also explore two regulation changes as exogenous shocks
to issuers' liquidity before and after IPO, respectively. With a difference-in-differences
approach, we find that underpricing is more pronounced with better expected post-IPO
liquidity or lower pre-IPO liquidity.
Keywords: Liquidity, IPO Underpricing, Nash Bargaining Game
JEL Classification: G32, G34
Suggested Citation: Suggested Citation