Headline Underpricing and Entrepreneurial Wealth Losses in Ipos: Theory and Evidence

CEPR Discussion Paper No. 1873

Posted: 18 Aug 1998

See all articles by Michel A. Habib

Michel A. Habib

University of Zurich; Swiss Finance Institute

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Date Written: April 1998

Abstract

We develop the implications of the observation that entrepreneurs can affect, to some extent at least, the level of underpricing in their firms? Initial Public Offerings (IPOs) by, for example, choosing highly reputable investment bankers as underwriters. We argue that entrepreneurs can, and will, minimize underpricing, but that they will do so only to an extent that is commensurate with the minimization of their wealth losses. Our empirical results suggest this is indeed the case in the United States: entrepreneurs will minimize underpricing until their marginal wealth losses equal the marginal cost of reducing headline underpricing. This suggests that private benefits may not be of primary importance when going public.

JEL Classification: G32

Suggested Citation

Habib, Michel A. and Ljungqvist, Alexander, Headline Underpricing and Entrepreneurial Wealth Losses in Ipos: Theory and Evidence (April 1998). CEPR Discussion Paper No. 1873, Available at SSRN: https://ssrn.com/abstract=108212

Michel A. Habib (Contact Author)

University of Zurich ( email )

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HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

c/o University of Geneva
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CH-1211 Geneva 4
Switzerland

Alexander Ljungqvist

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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