Underpricing and IPO Proceeds: A Note

Posted: 7 May 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

Every equilibrium model of IPO underpricing predicts a positive relationship between ex ante uncertainty about firm value and the extent to which entrepreneurs will issue shares at a discount to their subsequent market value. Since ex ante uncertainty is unobservable, the empirical literature has used a number of proxies for such uncertainty. The purpose of this note is to show that a popular proxy, the inverse of gross flotation proceeds, may be inappropriate for the purpose of testing the positive relation predicted by theory. We prove that an inverse relation between underpricing and IPO proceeds holds true because of dilution, even as uncertainty remains unchanged.

Keywords: Underpricing, IPO proceeds, Uncertainty

JEL Classification: G32

Suggested Citation

Ljungqvist, Alexander and Habib, Michel A., Underpricing and IPO Proceeds: A Note. Economics Letters, Vol. 61 (3), Available at SSRN: https://ssrn.com/abstract=265016

Alexander Ljungqvist (Contact Author)

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

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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