The Pricing of IPO Services and Issues: Theory and Estimation

52 Pages Posted: 12 Oct 2011 Last revised: 17 Mar 2012

Richard Lowery

University of Texas-Austin

Ari Choi Kang

University of Texas at Austin - Department of Finance

Date Written: October 12, 2011

Abstract

By modeling the market for IPOs as a repeated game with imperfect monitoring, we establish that collusion among underwriters explains the concentration of spreads at 7%, along with other characters of the data on spreads. Furthermore, the structure of optimal spreads in the model explains the existence and quantitative characteristics of underpricing in the market for IPO shares. We estimate the model by deriving moment conditions from both underpricing and spreads. Our estimates indicate that IPOs destroy value on average over the sample period 1985-2007. This result, however, is driven primarily by the dot-com era. Excluding this period, IPOs appear to increase value.

Keywords: IPOs, underpricing

Suggested Citation

Lowery, Richard and Kang, Ari Choi, The Pricing of IPO Services and Issues: Theory and Estimation (October 12, 2011). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1942940 or http://dx.doi.org/10.2139/ssrn.1942940

Richard Lowery (Contact Author)

University of Texas-Austin ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Ari Choi Kang

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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