Ownership dispersion, costly information, and IPO underpricing

Ownership dispersion, costly information, and IPO underpricing We develop an explanation for IPO underpricing in which the issuer's demand for ownership dispersion creates an incentive to underprice. Promoting oversubscription allows broad initial ownership, which in turn increases secondary-market liquidity. Increased liquidity reduces the required return to investors. Broad initial ownership, however, requires an increase in investor-borne information costs. These information costs are offset through initial underpricing. Empirical results are consistent with initial underpricing reflecting the level of ownership dispersion. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics elsevier

Ownership dispersion, costly information, and IPO underpricing

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Publisher
Elsevier
Copyright
Copyright © 1996 Elsevier Ltd
ISSN
0304-405x
D.O.I.
10.1016/0304-405X(95)00862-9
Publisher site
See Article on Publisher Site

Abstract

We develop an explanation for IPO underpricing in which the issuer's demand for ownership dispersion creates an incentive to underprice. Promoting oversubscription allows broad initial ownership, which in turn increases secondary-market liquidity. Increased liquidity reduces the required return to investors. Broad initial ownership, however, requires an increase in investor-borne information costs. These information costs are offset through initial underpricing. Empirical results are consistent with initial underpricing reflecting the level of ownership dispersion.

Journal

Journal of Financial Economicselsevier

Published: Jun 1, 1996

References

  • The pricing of initial public offers: A dynamic model with information production
    Chemmanur, Thomas J.
  • Evidence on the strategic allocation of initial public offerings
    Hanley, Kathleen Weiss; Wilhelm, William J.
  • Venture capitalist certification in initial public offerings
    Megginson, W.; Weiss, K.
  • A simple model of capital market equilibrium with incomplete information
    Merton, Robert C.
  • The long-run performance of initial public offerings
    Ritter, Jay R.
  • Sequential sales, learning, and cascades
    Welch, Ivo

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