Investing in Security Price Informativeness: The Role of IPO Underpricing
60 Pages Posted: 2 Nov 2013 Last revised: 4 Feb 2016
Date Written: February 4, 2016
I develop a theory in which firms enhance the information content of their future stock prices by using underwriters to direct underpriced IPO allocations to information-producing investors. Sufficiently large allocations and the promise of future, profitable IPO participation provide incentives for investors to produce information after the IPO. Increasing underpricing strengthens these incentives, resulting in a more informative post-IPO price and higher firm value. Firms' desires for more informative post-IPO pricing lead to new rationales for IPO underpricing and the intermediating role of underwriters. Empirical tests support the theory's novel implications.
Keywords: IPO Underpricing, Information Production, Growth Options, Price Feedback, Institutional Investors, Underwriters
JEL Classification: G14, G23, G32
Suggested Citation: Suggested Citation