Limited Attention, Legalized Bribery and the Initial Public Offering Process
61 Pages Posted: 14 Mar 2006 Last revised: 4 Aug 2020
Date Written: July 31, 2020
An initial public offering (IPO) is one time when a company can legally ‘bribe’ institutional investors to pay attention to it – investors that regularly attend road shows and give reliable feedback can expect allocations of underpriced shares in hot offerings. Our model generates a novel set of predictions regarding the relationship between initial returns and attention, retention, expansion and the benefits of attention, plus the asymmetry of the relationship with attention. Consistent with our model, investors’ attention is positively related to both initial returns and the magnitude of price revision. The relationship between attention and underpricing is asymmetric, and stronger when ex ante uncertainty is greater. Our work has implications regarding direct listings, is consistent with partial adjustment to public information, explains the relative unpopularity of grey market/when-issued trading and predicts that, even if the JOBS Act leads to more active pre-IPO trading (through crowdinvesting/equity crowdfunding), underpricing will still occur.
Keywords: Limited attention, initial public offerings, investor attention, IPO underpricing, JOBS Act, pre-IPO trading, equity crowdfunding, crowdinvesting
JEL Classification: G32, G24, G14
Suggested Citation: Suggested Citation