Incentives to Underprice

15 Pages Posted: 20 Oct 2006

See all articles by Graeme Camp

Graeme Camp

University of Auckland - Department of Accounting and Finance

Aimee Comer

PricewaterhouseCoopers

Janice C. Y. How

Queensland University of Technology; Financial Research Network (FIRN)

Abstract

In an initial public offering, the choices made by issuers, such as the offer price, might not appear to be wealth maximizing. In this article, we argue that the choices are strategic. Based on the model developed by Barry (1989), we show that the average change in the issuer's wealth (4.52 per cent) is lower than the average loss implied by underpricing (12.09 per cent). Our results support the notion that the choices issuers make at the offering generate a compensatory benefit in the aftermarket. That the issuer may well not suffer a net wealth loss from the offering is in accordance with continued initial public offering activity.

Suggested Citation

Camp, Graeme and Comer, Aimee and How, Janice C. Y., Incentives to Underprice. Accounting and Finance, Vol. 46, No. 4, pp. 537-551, December 2006. Available at SSRN: https://ssrn.com/abstract=938831 or http://dx.doi.org/10.1111/j.1467-629X.2006.00182.x

Graeme Camp (Contact Author)

University of Auckland - Department of Accounting and Finance ( email )

Private Bag 92019
Auckland
New Zealand
+ 64 9 3737 599 ext. 7321 (Phone)
+ 64 9 3737 406 (Fax)

HOME PAGE: http://www.business.auckland.ac.nz/personal_webpag

Aimee Comer

PricewaterhouseCoopers

1301 Avenue of the Americas
New York, NY 10019
United States

Janice C. Y. How

Queensland University of Technology ( email )

2 George Street
Brisbane, Queensland 4000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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