International Differences in Oversubscription and Underpricing of Ipos

Posted: 2 Sep 1999

See all articles by Bhagwan Chowdhry

Bhagwan Chowdhry

UCLA Anderson; Indian School of Business

Ann E. Sherman

DePaul University

Date Written: July 1994

Abstract

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

Chowdhry, Bhagwan and Sherman, Ann E., International Differences in Oversubscription and Underpricing of Ipos (July 1994). Available at SSRN: https://ssrn.com/abstract=5446

Bhagwan Chowdhry (Contact Author)

UCLA Anderson ( email )

Los Angeles, CA 90095-1481
United States
310-825-5883 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://bit.ly/bhagwanUCLA

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India

HOME PAGE: http://bit.ly/bhagwanUCLA

Ann E. Sherman

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5499 (Phone)

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