Underpricing and Entrepreneurial Wealth Losses in Ipos: Theory and Evidence

42 Pages Posted: 10 May 2001

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); 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

Date Written: February 2000

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.

JEL Classification: G32

Suggested Citation

Ljungqvist, Alexander and Habib, Michel A., Underpricing and Entrepreneurial Wealth Losses in Ipos: Theory and Evidence (February 2000). Available at SSRN: https://ssrn.com/abstract=263810 or http://dx.doi.org/10.2139/ssrn.263810

Alexander Ljungqvist (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Belgium

Research Institute of Industrial Economics (IFN) ( email )

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Michel A. Habib

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
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CH-1211 Geneva 4
Switzerland

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