49 Pages Posted: 14 Mar 2006 Last revised: 28 Nov 2016
Date Written: November 24, 2016
Recent research indicates that attracting pre-offer investor attention yields long term benefits to an initial public offering (IPO) issuer. For investors with limited attention, we model a way in which firms may attract attention: through underpricing their IPO, and using the expected allocations of underpriced shares to induce investors to attend the road show and consider the offering. Consistent with our model, we show that our measure of attention, a simple count of news articles mentioning a company’s name in the last week pre-IPO, is positively related to both price revision and initial return for the company’s stock. One extra piece of media coverage in the last week before the IPO is associated with a 2.2% greater initial return (4.0%, if the offer price is revised upwards). The positive relationship between media coverage and underpricing is asymmetric, and is stronger when ex ante uncertainty is greater. Our model also generates novel predictions regarding the relationship between initial returns and retention, expansion, and the benefits and opportunity costs of attention for various issuers. Our model explains the relative unpopularity of grey market or when-issued trading before IPOs and predicts that, even if the JOBS Act leads to more active pre-IPO trading in the US (for example, through equity crowdfunding or crowdinvesting), 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
Liu, Laura Xiaolei and Lu, Ruichang and Sherman, Ann E. and Zhang, Yong, Attracting Attention in an IPO (November 24, 2016). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=890602 or http://dx.doi.org/10.2139/ssrn.890602
By Ti Liu