Underpricing and Entrepreneurial Wealth Losses in Ipos: Theory and Evidence

Posted: 19 Mar 2001

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Michel A. Habib

University of Zurich; Swiss Finance Institute

Abstract

We model owners as solving a multidimensional problem when taking their firms public. Owners can affect the level of underpricing through the choices they make in promoting an issue, such as which underwriter to hire or what exchange to list on. The benefits of reducing underpricing in this way depend on the owners' participation in the offering and the magnitude of the dilution they suffer on retained shares. We argue that the extent to which owners trade-off underpricing and promotion is determined by the minimization of their wealth losses. Evidence from a sample of U.S. IPOs confirms our empirical predictions.

Suggested Citation

Ljungqvist, Alexander and Habib, Michel A., Underpricing and Entrepreneurial Wealth Losses in Ipos: Theory and Evidence. Review of Financial Studies, Vol. 14, No. 2, Available at SSRN: https://ssrn.com/abstract=250545

Alexander Ljungqvist

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Michel A. Habib (Contact Author)

University of Zurich ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland
41-44-634-2507 (Phone)
41-44-634-4903 (Fax)

HOME PAGE: http://www.isb.uzh.ch/institut/profs/mhabib.htm

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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