Lowballing for 'Pop': The Case of Internet IPO Underpricing

28 Pages Posted: 27 Jan 2001

See all articles by Larry DuCharme

Larry DuCharme

University of Washington

Shivaram Rajgopal

Columbia Business School

Stephan Sefcik

University of Washington - Department of Accounting

Date Written: January 2001

Abstract

Three explanations are commonly offered for the unprecedented levels of underpricing in recent IPOs by Internet firms: (1) media hype drives underpricing; (2) Internet firms leave money on the table to be able to follow up underpriced IPOs with follow on financing offers; and (3) underpricing is a branding event designed to increase consumer awareness of the Internet company. We examine the relation between the extent of Internet IPO underpricing and proxies to test the three explanations. We measure media hype as the extent of media exposure pre IPO. The desire to return to the market is proxied by the rate at which the firm burns through its IPO offer proceeds on operating and investing activities. Proxies for branding include whether the firm is a Business to Consumer company (B2C) and the extent of revenue increase post IPO. Results indicate that media hype and the desire to return to the capital market are strongly associated with Internet IPO underpricing. Although underpricing is higher for B2C firms, sales increases post IPO are not significantly related to the extent of underpricing. Finally, there is at best weak evidence to suggest that post offer return performance is worse for Internet IPOs with greater underpricing.

JEL Classification: M41, G12, G24

Suggested Citation

DuCharme, Larry and Rajgopal, Shivaram and Sefcik, Stephan E., Lowballing for 'Pop': The Case of Internet IPO Underpricing (January 2001). Available at SSRN: https://ssrn.com/abstract=257725 or http://dx.doi.org/10.2139/ssrn.257725

Larry DuCharme

University of Washington ( email )

Box 353200
School of Business Administration 231 Mackenzie Hall
Seattle, WA 98195-3200
United States

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Stephan E. Sefcik

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,020
Abstract Views
4,340
rank
21,533
PlumX Metrics