Liquidity Value and IPO Underpricing

62 Pages Posted: 11 Dec 2018 Last revised: 26 Jun 2019

See all articles by Wei Gao

Wei Gao

Temple University - Department of Finance

Lily Li

Temple University - Department of Finance

Hongda Zhong

London School of Economics & Political Science (LSE) - Department of Finance

Date Written: June 24, 2019

Abstract

Initial public offerings (IPOs) transform private firms into publicly traded ones, thereby improving liquidity of their shares. Better liquidity increases firm value, which we call “liquidity value”. We develop a model and hypothesize that issuers and IPO investors bargain over the liquidity value, resulting in a discounted offer price, i.e., IPO underpricing. Consistent with the model, we find that underpricing is positively related to the expected post-IPO liquidity of the issuer. The relation is stronger when firms are financed by venture capital investors, when the underwriter has more bargaining power, or when a smaller fraction of the firm is sold. We also explore two regulation changes as exogenous shocks to issuers’ liquidity before and after IPO, respectively. With a difference-in-difference approach, we find that underpricing is more pronounced with better expected post-IPO liquidity or lower pre-IPO liquidity.

Keywords: Liquidity, IPO Underpricing, Nash Bargaining Game

JEL Classification: G32, G34

Suggested Citation

Gao, Wei and Li, Lily Yuanzhi and Zhong, Hongda, Liquidity Value and IPO Underpricing (June 24, 2019). Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3286358 or http://dx.doi.org/10.2139/ssrn.3286358

Wei Gao

Temple University - Department of Finance ( email )

Philadelphia, PA 19122
United States

Lily Yuanzhi Li (Contact Author)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Hongda Zhong

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

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