IPO Pricing as a Function of Your Investment Banks’ Past Mistakes: The Case of Facebook

24 Pages Posted: 30 Nov 2015 Last revised: 2 Feb 2016

Date Written: January 2016


On May 18, 2012 Facebook held its initial public offering (IPO), raising over $16 billion making it one of the largest IPOs in history. To the surprise of many investors, there was no underpricing ― the stock closed the first day of trading flat from its offer price. The Facebook IPO was described as not only disappointing but also detrimental to the broader market. We explore why one IPO should have such widespread consequences. We document that the IPO market was silent for 41 days following Facebook. When it re-opened 41 days later, the average level of underpricing increased from 11% pre-Facebook to 20% post-Facebook. The common blame was an overall increase in risk-aversion among investors. We offer an alternative explanation. We show that the entire increase in underpricing is concentrated in the IPOs of the Facebook lead underwriters. We find no statistical difference in underpricing pre and post-Facebook for non-Facebook underwriters. We argue that investment bank loyalty to their institutional investor client based propelled the Facebook underwriters to increase underpricing to compensate for the perceived losses on Facebook.

Keywords: IPOs, Underpricing, Facebook

JEL Classification: G14, G24

Suggested Citation

Krigman, Laurie and Jeffus, Wendy, IPO Pricing as a Function of Your Investment Banks’ Past Mistakes: The Case of Facebook (January 2016). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2696474 or http://dx.doi.org/10.2139/ssrn.2696474

Laurie Krigman (Contact Author)

Babson College ( email )

Finance Division
321 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4246 (Phone)

Wendy Jeffus

Babson College ( email )

231 Forest St.
Babson Park, MA 02457-0310
United States

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