IPO Pricing and Share Allocation: The Importance of Being Ignorant
Posted: 14 Apr 2011
Date Written: April, 12 2011
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: Suggested Citation