Why Has IPO Underpricing Changed Over Time?

55 Pages Posted: 18 Sep 2002

See all articles by Tim Loughran

Tim Loughran

University of Notre Dame

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate

Multiple version iconThere are 2 versions of this paper

Date Written: December 3, 2002


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

Suggested Citation

Loughran, Tim and Ritter, Jay R., Why Has IPO Underpricing Changed Over Time? (December 3, 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=331780 or http://dx.doi.org/10.2139/ssrn.331780

Tim Loughran (Contact Author)

University of Notre Dame ( email )

Department of Finance
245 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-8432 (Phone)
574-631-5255 (Fax)

Jay R. Ritter

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
(352) 846-2837 (Phone)
(352) 392-0301 (Fax)

HOME PAGE: http://bear.cba.ufl.edu/ritter

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