Litigation Risk and IPO Underpricing

43 Pages Posted: 26 Oct 2011

Date Written: October 26, 2001


We examine the relation between litigation risk and IPO underpricing and test two aspects of the litigation-risk hypothesis: (1) firms with higher litigation risk underprice their IPOs by a greater amount as a form of insurance (insurance effect) and (2) higher underpricing lowers expected litigation costs (deterrence effect). To adjust for the endogeneity bias in previous studies, we use a simultaneous equation framework. Evidence provides support for both aspects of the litigation-risk hypothesis.

Keywords: Initial public offering, IPO underpricing, Securities litigation, Endogeneity

JEL Classification: G24, G32, K22, K40

Suggested Citation

Lowry, Michelle B., Litigation Risk and IPO Underpricing (October 26, 2001). Journal of Financial Economics (JFE), Vol. 65, 2002. Available at SSRN:

Michelle B. Lowry (Contact Author)

Drexel University ( email )

Philadelphia, PA 19104
United States
215-895-6070 (Phone)

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