A Fully-Rational Liquidity-Based Theory of IPO Underpricing and Underperformance
I present a fully-rational symmetric-information model of an IPO, as well as a dynamic imperfectly competitive model of the aftermarket trading that follows. The model helps explain why IPO share allocations favor large institutional investors. It also helps to explain IPO underpricing, and underperformance, and the large fees charged by underwriters. The critical assumption in the model is that underwriters need to sell a .xed number of shares at the IPO or soon thereafter in the aftermarket, but they want to avoid selling in the aftermarket because there are some aftermarket investors who have market power and can a.ect the prices received by the underwriter. To maximize revenue and avoid unnecessary aftermarket sales, the underwriter distorts share allocations toward those those investors who have market power, and he sets the o.er price at the IPO below the aftermarket price that will prevail shortly after the IPO. In the aftermarket model, I show that there are share allocations that can generate arbitrarily high levels of return underperformance for very long periods of time. In some simulations, the distorted share allocations at the IPO generate return underperformance that persists for more than one year. The underwriter can dilute investor抯 market power by participating for longer periods of time in the aftermarket. By doing so, he sometimes substantially increase the revenue that is raised by the IPO issuer.
Matthew Pritsker
The Federal Researve Board,Mail Stop 91,Washington DC 20551
国际会议
昆明
英文
2005-07-05（万方平台首次上网日期，不代表论文的发表时间）