Some Evidence of 'Publicity Multipliers' in Initial Public Offerings (IPOs)

31 Pages Posted: 15 Sep 2017 Last revised: 1 Sep 2018

See all articles by Peita Lin

Peita Lin

QUT

Janice C. Y. How

Queensland University of Technology; Financial Research Network (FIRN)

Peter Verhoeven

Queensland University of Technology - QUT Business School; Financial Research Network (FIRN)

Date Written: September 10, 2017

Abstract

We develop a theory of speculative bidding to explain why IPOs are persistently underpriced. Using the global games framework, we show IPO offer prices act as a coordination mechanism which causes rational investors to overreact to offer price revisions. Empirical tests show the magnitude of market overreactions increases when investors acquire information in anticipation of the IPO, suggesting that IPO underpricing is an inevitable consequence of the book build mechanism. An unfortunate corollary is that underwriters' attempts to price efficiently inadvertently increase the effectiveness of price revisions as a coordination mechanism, leading to persistent "underpricing".

Keywords: IPOs, global games, coordination games, speculation, ICOs

JEL Classification: D45, D46

Suggested Citation

Lin, Peita and How, Janice C. Y. and Verhoeven, Peter, Some Evidence of 'Publicity Multipliers' in Initial Public Offerings (IPOs) (September 10, 2017). Available at SSRN: https://ssrn.com/abstract=3034879 or http://dx.doi.org/10.2139/ssrn.3034879

Peita Lin (Contact Author)

QUT ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Janice C. Y. How

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Peter Verhoeven

Queensland University of Technology - QUT Business School ( email )

GPO Box 2434
Brisbane, Queensland 4001
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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