Issuer IPO Underpricing and Directed Share Program (DSP)

49 Pages Posted: 8 Feb 2020 Last revised: 16 Mar 2021

See all articles by Beng Soon Chong

Beng Soon Chong

Nanyang Business School, Nanyang Technological University

Zhenbin Liu

Hong Kong Baptist University

Date Written: January 1, 2020

Abstract

The issuer underpricing hypothesis addresses why IPOs with a Directed Share Program (DSP) are substantially more underpriced and why the issuers are not upset over the additional money left on the table. In support of the hypothesis, we find that both the final size and likelihood of DSP adoption are greater when expected IPO underpricing is high. Issuers with a DSP also strategically underprice their IPO through a downward bias in offer price adjustments, but will do so only when the cost is not prohibitive. Finally, the first-day IPO return is relatively higher when directed shares are allocated to customers.

Keywords: Directed Share Program; Initial Public Offerings; IPO Underpricing; Partial Adjustment Phenomenon; Prospect Theory; Lockup

JEL Classification: G14; G32

Suggested Citation

Chong, Beng Soon and Liu, Zhenbin, Issuer IPO Underpricing and Directed Share Program (DSP) (January 1, 2020). Journal of Empirical Finance, Forthcoming, Nanyang Business School Research Paper No. 20-01, Available at SSRN: https://ssrn.com/abstract=3519882

Beng Soon Chong (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Zhenbin Liu

Hong Kong Baptist University ( email )

Kowloon Tong, Kowloon
Hong Kong

HOME PAGE: http://aclw.hkbu.edu.hk/eng/faculty/admin-details.jsp?id=zbliuHKB&cv=00069&cid=306&cp=1

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