IPO Underpricing and Underwriting Spreads: Evidence for Dichotomy of Formation

46 Pages Posted: 1 Jan 2020

Date Written: December 11, 2019

Abstract

The formal theoretical model in this study explicitly establishes the following results. Suppose the distribution of IPO quality either is time invariant, or equivalently, that distributions for IPO underpricing and underwriting spreads are explicitly conditioned on realizations of IPO quality. Within this context, cross-sectional relations that subsist between IPO underpricing and underwriting spreads, which are shown to be negative, predominate. Suppose, on the contrary, that the distribution of IPO quality is time varying. In this context, time series relations between IPO underpricing and underwriting spreads, which are shown to be positive, tend to predominate. If time series relations exactly counterbalance cross-sectional relations, relations between IPO underpricing and underwriting spreads turn out statistically insignificant. Combined, study findings show the distribution of IPO underwriting spreads and underpricing cannot be induced by exactly the same economic agents. Given the distribution of underwriting spreads is shown, in context of a non-cooperative game theoretic rational expectations equilibrium, to be induced by underwriters, by default, the distribution of underpricing is predicted to be induced by investors. This prediction implies models of IPO underpricing within which equilibriums for underpricing are determined by underwriters cannot be deemed to be robust.

Keywords: IPO Underpricing, Equity Issue Spread, Underwriting, IPO Quality, Rational Expectations Equilibrium, Game Theory

JEL Classification: G24, D41, D47, D81, D82, D83

Suggested Citation

Obrimah, Oghenovo A., IPO Underpricing and Underwriting Spreads: Evidence for Dichotomy of Formation (December 11, 2019). Available at SSRN: https://ssrn.com/abstract=3502202 or http://dx.doi.org/10.2139/ssrn.3502202

Oghenovo A. Obrimah (Contact Author)

FISK University ( email )

1000 17th Ave N
Nashville, TN TN 37208-3051
United States
4049404990 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
22
Abstract Views
252
PlumX Metrics