Underpricing of Initial Public Offerings (IPOs) and the Credibility of Underwriters' Pricing Services

SN Business & Economics 3, 45

44 Pages Posted: 30 Jun 2017 Last revised: 23 Jul 2023

Date Written: May 30, 2021

Abstract

This study provides formal theoretical evidence that the credibility of underwriters' pricing services is evident in the magnitude of intertemporal dampening that is imposed on IPO underpricing by underwriters in response to increases to the severity of valuation uncertainty risk. Using aggregate IPO volume as the measure for the reputation of underwriters, and a formally and theoretically motivated measure for the severity of valuation uncertainty risk - in this specific study, the proxy for the measure is derived from the Fama-French HML (high minus low book-to-market) factor - empirical results show reputable underwriters dampen underpricing by much more than less reputable underwriters, as such provide exogenous evidence for the robustness of casting of IPO volume as a proxy for the credibility of underwriting. Evidence that high IPO quality can be associated with either of low or high underpricing facilitates the inference that the credibility of underwriting cannot be robustly inferred from time specific realizations for IPO underpricing. Necessarily, as such studies of the credibility of underwriters' pricing services are specified to be intertemporal, not cross-sectional. Robustness of study inferences is evident in the conformity of empirical findings with the stylized fact that high quality issuers exhibit preference for reputable underwriters.

Keywords: Reputation, Underwriters, Adverse Selection, Valuation Uncertainty, Book-to-Market, HML

JEL Classification: G24, G12

Suggested Citation

Obrimah, Oghenovo A., Underpricing of Initial Public Offerings (IPOs) and the Credibility of Underwriters' Pricing Services (May 30, 2021). SN Business & Economics 3, 45, Available at SSRN: https://ssrn.com/abstract=2994768 or http://dx.doi.org/10.2139/ssrn.2994768

Oghenovo A. Obrimah (Contact Author)

FISK University ( email )

1000 17th Ave N
Nashville, TN TN 37208-3051
United States
4049404990 (Phone)

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