Why Was Internet IPO Underpricing so Severe?

Abstract

We examine several explanations drawn from prior academic research and current popular press anecdotes for the unprecedented level of underpricing in Internet IPOs. Our sample consists of 342 Internet firms that went public between 1988 and 1999 and a matched sample of 249 non-Internet IPOs. The desire to make a seasoned equity offer (SEO), the presence of high quality underwriters, and greater media exposure pre-IPO are uniquely associated with Internet IPO underpricing. Post-offer return performance is worse for hot Internet IPOs that receive more media attention before the IPO date. Matched IPOs backed by high quality underwriters perform relatively well in the post-offer period although there is no association between underwriter quality and the long-run performance of Internet IPOs.

JEL Classification: G12, G24, G14, M41