Why Has IPO Underpricing Changed Over Time?

Abstract

In the 1980s, the average first-day return on initial public offerings (IPOs) was 7%. The average first-day return doubled to almost 15% during 1990-1998, before jumping to 65% during the internet bubble years of 1999-2000. Part of the increase can be attributed to changes in the risk composition of the companies going public and a realignment of incentives. We attribute much of the higher underpricing during the bubble period to a changing issuer objective function. We argue that in the later periods there was less focus on maximizing IPO proceeds due to both an increased emphasis on research coverage and allocations of hot IPOs to the personal brokerage accounts of issuing firm executives.

Keywords: Initial public offerings, internet bubble, underwriter reputation, spinning