Innovation, Appropriability and the Underpricing of Initial Public Offerings
Posted: 6 Mar 2009
Using the information asymmetries theory of underpricing, we investigate the role of innovation in the underpricing of initial public offerings (IPOs). We develop and test a model in which innovation outputs (patents) reduce information asymmetries in industries where the link between patents and inventive returns is transparent, thereby reducing underpricing. Conversely, these innovation outputs (patents) reflect increased information asymmetries and underpricing in industries where the link is opaque. We examine the relationship between patents and first-day stock returns in a sample of 1413 IPOs by manufacturing firms and find strong support for our hypotheses. In so doing, we make an important theoretical contribution by showing that the IPO market contextualizes firm information. That is, firm information is interpreted differently by the IPO market, depending on the firm's competitive context.
JEL Classification: D82, G32, L10
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