Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings

Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings ABSTRACT This paper presents a signalling model in which high‐quality firms underprice at the initial public offering (IPO) in order to obtain a higher price at a seasoned offering. The main assumptions are that low‐quality firms must invest in imitation expenses to appear to be high‐quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high‐quality firms at the IPO can then add sufficient signalling costs to these imitation expenses to induce low‐quality firms to reveal their quality voluntarily. The model is consistent with several documented empirical regularities and offers new testable implications. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital in the years after their IPO. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings

The Journal of Finance, Volume 44 (2) – Jun 1, 1989

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Publisher
Wiley
Copyright
1989 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1989.tb05064.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT This paper presents a signalling model in which high‐quality firms underprice at the initial public offering (IPO) in order to obtain a higher price at a seasoned offering. The main assumptions are that low‐quality firms must invest in imitation expenses to appear to be high‐quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high‐quality firms at the IPO can then add sufficient signalling costs to these imitation expenses to induce low‐quality firms to reveal their quality voluntarily. The model is consistent with several documented empirical regularities and offers new testable implications. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital in the years after their IPO.

Journal

The Journal of FinanceWiley

Published: Jun 1, 1989

References

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