Public Information and IPO Underpricing

50 Pages Posted: 14 Aug 2010 Last revised: 9 Nov 2018

See all articles by Einar Bakke

Einar Bakke

Norwegian School of Economics (NHH); Centre For Finance

Tore E. Leite

Norwegian School of Economics (NHH)

Karin S. Thorburn

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 22, 2011

Abstract

We analyze the effect of public information on rational investors' incentives to reveal private information during the bookbuilding process and their demand for allocations in the IPO. Our model generates several new predictions. First, investors require more underpricing to truthfully reveal positive private information in bear markets than in bull markets (the incentive effect). Second, the fraction of positive private signals and of underpriced IPOs is increasing in market returns (the demand effect). Combined, these two effects can explain why IPO underpricing is positively related to pre-issue market returns, consistent with extant evidence. Using a sample of 5,000 U.S. IPOs from 1981-2008, we show that the empirical implications of the model are borne out in the data.

Keywords: public information, partial adjustment, underpricing, IPOs, bookbuilding

JEL Classification: G10, G32

Suggested Citation

Bakke, Einar and Leite, Tore E. and Thorburn, Karin S., Public Information and IPO Underpricing (August 22, 2011). 24th Australasian Finance and Banking Conference 2011 Paper; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 322/2011. Available at SSRN: https://ssrn.com/abstract=1657812 or http://dx.doi.org/10.2139/ssrn.1657812

Einar Bakke

Norwegian School of Economics (NHH) ( email )

Helleveien 30
N-5045 Bergen
Norway
+4793423808 (Phone)

Centre For Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

HOME PAGE: http://www.cff.handels.gu.se/

Tore E. Leite

Norwegian School of Economics (NHH) ( email )

Helleveien 30
N-5045 Bergen
Norway
+47 5595 9343 (Phone)
+47 5595 9841 (Fax)

Karin S. Thorburn (Contact Author)

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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