Anatomy of Initial Public Offerings of Common Stock

Seha M. Tiniç

539 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Credit Risk and Financial Regulations

Abstract

ABSTRACT Initial public offerings of common stocks (IPOs) are typically underpriced. In this paper, the author develops and tests the hypothesis that underpricing serves as a form of insurance against legal liability and the associated damages to the reputations of investment bankers. The empirical results based on samples of IPOs that were brought to the market before and after the Securities Act of 1933 provide considerable support for the implicit insurance hypothesis. Specifically, gross underpricing and market segmentation between prestigious and fringe investment bankers in originating unseasoned new issues appear to be peculiar to the post‐1933 era.

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References

1996Production, Information Costs and Economic Organization 1986Why new issues are underpriced 1986Investment banking, reputation, and the underpricing of initial public offerings 1984The "Hot Issue" Market of 1980 1975Price performance of common stock new issues 1986Capital raising, underwriting and the certification hypothesis 1982A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues 1985Differential Information and Security Market Equilibrium

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2005Investment Bank Reputation and the Price and Quality of Underwriting Services 2013Word power: A new approach for content analysis 2008Environmental uncertainty and managers’ use of discretionary accruals 2002A Review of IPO Activity, Pricing and Allocations 1993The Pricing of Initial Public Offerings: A Dynamic Model with Information Production 2003Getting Off to a Good Start: The Effects of Upper Echelon Affiliations on Underwriter Prestige

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