IPO Pricing and Share Allocation: The Importance of Being Ignorant

Posted: 14 Apr 2011

See all articles by Céline Gondat-Larralde

Céline Gondat-Larralde

Kevin R. James

London School of Economics & Political Science (LSE) - Systemic Risk Centre

Date Written: April, 12 2011

Abstract

Since an underwriter sets an IPO's offer price without knowing its market value, investors can acquire information about its value and avoid overpriced deals ("lemon-doge"). To mitigate this well-known risk, the bank enters into a repeat game with a coalition of investors who do not lemon-dodge in exchange for on-average underpriced shares. We (i) derive and test a quantitative IPO pricing rule (showing that tech IPOs were not excessively underpriced during the boom of the 1990s); and (ii) analyzing a unique multibank data set, find strong support for the conjecture that a bank preferentially allocates shares to its coalition.

Keywords: Initial public offerings, underpricing, book-building, asymmetric information, investment banking

JEL Classification: G24, D82, G32, G18

Suggested Citation

Gondat-Larralde, Céline and James, Kevin Roger, IPO Pricing and Share Allocation: The Importance of Being Ignorant (April, 12 2011). Journal of Finance, Vol. 63, No. 1, February 2008. Available at SSRN: https://ssrn.com/abstract=1807922

Kevin Roger James

London School of Economics & Political Science (LSE) - Systemic Risk Centre ( email )

Houghton St
London
United Kingdom

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