International Differences in Oversubscription and Underpricing of Ipos
Posted: 2 Sep 1999
Date Written: July 1994
We argue that when the offer price of an IPO is set many days before the issue closes for bidding by investors (as is the case in countries such as Hong Kong, Singapore and the U.K.), relevant price information leaks and becomes public knowledge before investors have finished bidding for firm's shares. Consequently, there are instances when all investors realize ex ante that the offer price is ``too low'' and we observe a large oversubscription for firm's shares. There are also instances when the investors realize that the offer price is ``too high'' and the issue fails. In order to reduce the likelihood of instances in which the issue fails, the offering is underpriced. We further argue that if the underwriter collects the interest float on checks deposited by investors for shares they bid, this interest revenue reduces the cost associated with underpricing and thus provides an incentive to underprice the issue further. Our analysis allows us to explore some empirical and policy implications.
JEL Classification: G12, G15, G24
Suggested Citation: Suggested Citation