Underpricing of Ipos that Follow Private Placements

38 Pages Posted: 26 Mar 2006

See all articles by Hei Wai Lee

Hei Wai Lee

University of Michigan at Dearborn - School of Management

Kelly Nianyun Cai

University of Michigan at Dearborn - School of Management

Date Written: March 2006

Abstract

This study addresses the question of the effectiveness of private placements in mitigating the information asymmetry problem faced by IPO firms, and their impacts on issuing costs, both underpricing and underwriting spreads, of IPOs. We examine the underpricing of initial public offerings by firms that made private placements prior to their IPOs (PP IPO firms). We find that PP IPOs experience significantly lower underpricing. They also have smaller offer price revisions following the book building process. Furthermore, PP IPOs are associated with more reputable underwriting syndicates and lower underwriting spreads. These findings persist after we control for known factors that impact underpricing in the regression analysis. We conclude that the results are consistent with the information asymmetry explanation for the global phenomenon of IPO underpricing, and lend support to the notion that prior private placements help reduce information asymmetry, thus resulting in lower issuing costs for IPO firms.

Keywords: Underpricing, IPO, Private placement

JEL Classification: G24, D82, G12

Suggested Citation

Lee, Hei Wai and Cai, Kelly Nianyun, Underpricing of Ipos that Follow Private Placements (March 2006). Available at SSRN: https://ssrn.com/abstract=892004 or http://dx.doi.org/10.2139/ssrn.892004

Hei Wai Lee

University of Michigan at Dearborn - School of Management ( email )

4901 Evergreen Road
Dearborn, MI 48128-1491
United States
313-593-5524 (Phone)
313-593-5636 (Fax)

Kelly Nianyun Cai (Contact Author)

University of Michigan at Dearborn - School of Management ( email )

19000 Hubbard Dr.
Dearborn, MI 48126
United States

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