Why Don't Issuers Get Upset About Leaving Money on the Table in Ipos?

35 Pages Posted: 29 Sep 2000

See all articles by Tim Loughran

Tim Loughran

University of Notre Dame

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: August 21, 2000

Abstract

One of the puzzles regarding initial public offerings (IPOs) is that issuers rarely get upset about leaving substantial amounts of money on the table, defined as the number of shares sold times the difference between the first-day closing market price and the offer price. The average IPO leaves $9.1 million on the table. This number is approximately twice as large as the fees paid to investment bankers, and represents a substantial indirect cost to the issuing firm. We present a prospect theory model that focuses on the covariance of the money left on the table and wealth changes. Our reasoning also provides an explanation for a second puzzling pattern: much more money is left on the table following recent market rises than after market falls. This results in an explanation of hot issue markets. We also offer a new explanation for why IPOs are underpriced.

Keywords: Initial public offerings, prospect theory, behavioral finance, hot issue markets

Suggested Citation

Loughran, Tim and Ritter, Jay R., Why Don't Issuers Get Upset About Leaving Money on the Table in Ipos? (August 21, 2000). AFA 2001 New Orleans Meetings. Available at SSRN: https://ssrn.com/abstract=243145 or http://dx.doi.org/10.2139/ssrn.243145

Tim Loughran (Contact Author)

University of Notre Dame ( email )

Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
(352) 846-2837 (Phone)
(352) 392-0301 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/ritter

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