Investing in Security Price Informativeness: The Role of IPO Underpricing

60 Pages Posted: 2 Nov 2013 Last revised: 4 Feb 2016

David C. Brown

University of Arizona - Department of Finance

Date Written: February 4, 2016

Abstract

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

Brown, David C., Investing in Security Price Informativeness: The Role of IPO Underpricing (February 4, 2016). Available at SSRN: https://ssrn.com/abstract=2348309 or http://dx.doi.org/10.2139/ssrn.2348309

David C. Brown (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-626-0746 (Phone)

HOME PAGE: http://www.davidclaytonbrown.com

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