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Public information and IPO underpricing

Bakke, Einar; Leite, Tore; Thorburn, Karin S.
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URI
http://hdl.handle.net/11250/164157
Date
2010-08
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  • Discussion papers (FOR) [588]
Abstract
We analyze the effect of public information on rational investors' incentives to reveal

private information during the bookbuilding process and their demand for allocations in the IPO. Our model generates several new predictions. First, investors

require more underpricing to truthfully reveal positive private information in bear

markets than in bull markets (the incentive effect). Second, the fraction of positive

private signals and of underpriced IPOs is increasing in market returns (the demand

effect). Combined, these two effects can explain why IPO underpricing is positively

related to pre-issue market returns, consistent with extant evidence. Using a sample

of 5,000 U.S. IPOs from 1981-2008, we show that the empirical implications of the

model are borne out in the data.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2010:6

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