Regulatory and procedural effects on the underpricing of initial public offerings

Regulatory and procedural effects on the underpricing of initial public offerings

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Article ID: iaor201522969
Volume: 12
Issue: 3
Start Page Number: 193
End Page Number: 202
Publication Date: Sep 1989
Journal: Journal of Financial Research
Authors: ,
Keywords: investment, behaviour
Abstract:

In this paper, the pricing of initial public offerings (IPOs) is examined from the underwriter's point of view. It is shown that because of the regulations and procedures governing the underwriting and pricing of IPOs, underwriters can maximize expected income by underpricing IPOs. Thus, it is argued that in addition to other feasible explanations of the underpricing phenomenon (e.g., compensation to uninformed investors, insurance against legal liability, etc.), regulatory and procedural factors contribute to the underpricing of IPOs. This is shown to be true both when uninformed investors are present and absent from the market for IPOs.

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