Underwriter price support and the IPO underpricing puzzle

Abstract

This paper reassesses the apparent systematic underpricing of initial public offerings (IPOs). Investigation of the distribution of initial returns following IPOs shows that positive mean initial returns may reflect the existence of a partially unobserved left (negative) tail. Moreover, most IPOs with zero one-day returns subsequently fall in price, suggesting that underwriter price support may account for the skewed distribution and hence the phenomenon of positive average initial IPO returns, even if offering prices are set at expected market value. This paper thus challenges the presumption underlying previous research that positive average initial IPO returns result primarily from deliberate underpricing.

Research Topics

Paper Details

Title

Underwriter price support and the IPO underpricing puzzle

DOI

10.1016/0304-405x(93)90015-4

Published

Oct 1, 1993

Journal

Journal of Financial Economics

Volume

34

Issue

2

Pages

135–151