Price Support by Underwriters in Initial and Seasoned Public Offerings

Abstract

This study provides a new empirical test of theories that use asymmetric information to explain underpricing in initial public offerings (IPOs). These models stipulate that the underwriter compensates informed investors for their price-relevant information through underpricing and price support. In contrast to previous empirical studies that mostly focus on underpricing, our test is based on actual price support transactions. We argue that the underwriter depends substantially more on informed investors in IPOs than in seasoned equity offers (SEOs), where a history of market prices is available. We document substantial differences in how underwriters support IPOs and SEOs. The results are robust to different specifications and are consistent with the implications of several information theories of new issue pricing.

Keywords: Initial Public Offering, Seasoned Equity Offering, Underwriter Price Support

JEL Classification: G12, G24, K22