Why is IPO Underpricing a Global Phenomenon?
42 Pages Posted: 24 Aug 2010
Date Written: August 22, 2010
We explain why initial underpricing of new issue exists globally and is not arbitraged away in an efficient market. We argue that initial underpricing is a natural by-product of liquidity-motivated ownership dispersion requirements and divergence of opinion. In our framework, as shares are widely distributed to achieve exchange listing and related liquidity creation, optimistic investors rationed at the offering will bid up the share price in the secondary market, hence generating initial underpricing. We predict that as the level of divergence of opinion about an issue increases, underpricing will increase. We develop several proxies of divergence of opinion to explain the level of initial underpricing. The empirical results strongly support the model.
Keywords: Initial public offerings, underpricing, initial returns, divergence of opinion, ownership constraint, and liquidity requirements.
JEL Classification: G24,G32
Suggested Citation: Suggested Citation