Why is IPO Underpricing a Global Phenomenon?

42 Pages Posted: 24 Aug 2010

See all articles by James Booth

James Booth

DePaul University - Department of Finance

Lena Booth

Thunderbird, School of Global Management

Date Written: August 22, 2010

Abstract

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

Booth, James and Booth, Lena, Why is IPO Underpricing a Global Phenomenon? (August 22, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1663437 or http://dx.doi.org/10.2139/ssrn.1663437

James Booth

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604
United States

Lena Booth (Contact Author)

Thunderbird, School of Global Management ( email )

15249 N 59th Ave.
Glendale, AZ 85306
United States

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