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: | Affleck-Graves John, Miller Robert E |
Keywords: | investment, behaviour |
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.