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Transcript of IPO Underpricing Paper FINAL
6/24/2015
IPO Underpricing Why do shareholders leave money
on the table?
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah BEHAVIORAL FINANCE
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 1/15
Contents
1. Introduction ........................................................................................................................................... 2
2. IPO Methods .......................................................................................................................................... 3
3. Asymmetric Information ....................................................................................................................... 4
3.1. Information Revelation ................................................................................................................. 5
3.2. Adverse Selection .......................................................................................................................... 7
4. Behavioral Explanations ........................................................................................................................ 8
4.1 Investor Sentiment and Informational Cascades .......................................................................... 8
4.2. Prospect Theory .......................................................................................................................... 10
5. Conclusion ........................................................................................................................................... 11
References ................................................................................................................................................... 13
Appendix...................................................................................................................................................... 14
Appendix A .............................................................................................................................................. 14
Appendix B .............................................................................................................................................. 15
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 2/15
1. Introduction
IPOs are a major milestone for the company’s original shareholders – entrepreneurs, angel investors and
venture capitalists – as the point to withdraw their investments and harvest their assets. Given the
sophistication of the entrepreneurial, investment banking and investor industry, the IPO process should
run smoothly and result in efficient allocation of resources. However, the phenomenon of IPO
underpricing may raise questions about this inference (Jenkinson and Ljungqvist, 2001).
Underpricing refers to the percentage difference between the first day closing price and the offer price
to new shareholders. Empirical literature has abundantly documented large initial returns for newly
trading stocks. For instance, Ljungqvist (2007) provides evidence of underpricing in the U.S. market and
for a range of other developed countries (see Appendix A). Figure 1 reveals interesting observation
about underpricing: the degree of underpricing varies substantially over time (Ljungqvist, 2007).
Figure 1: Initial IPO returns in the United States, 1960 to 2003.
Source: Ljungqvist (2007), p. 382.
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 3/15
Existing shareholders suffer from two effects when the IPO is underpriced. First, if an individual
shareholder decides to sell her shares in the IPO, her loss reflects the underpricing multiplied by the
shares sold. Second, even if a shareholder does not sell her shares in the IPO, she will experience a loss
from additional dilution due to the underpricing of new shares. However, the shareholders’ total loss is
usually far smaller than the above documented underpricing as they only sell a fraction of their shares in
the IPO and few new shares are issued in the IPO. Thus, the measured underpricing overstates the loss
experienced by shareholders. Yet, shareholders could substantially benefit from less underpricing
(Jenkinson and Ljungqvist, 2001).
Underpricing thus raises the question, why original shareholders offer stakes in their company at a
considerably lower price than what the shares are worth in the aftermarket? Or put differently, why do
shareholders “leave money on table” in the IPO process?
2. IPO Methods
Before we turn to the various explanations for the underpricing phenomenon, we shortly discuss the
three IPO methods. In general, companies can choose between auctioning, fixed-price offers and book
building. Since underpricing varies across the IPO methods, the choice directly affects the money left on
the table.
Book building is a process managed by the underwriters in order to extract investors’ private
information about the issuing company (Benveniste and Spindt, 1989). As the initial pricing is highly
complex, the book building process aims to gather and aggregate investors’ valuation and demand in the
upcoming IPO. In doing so, the underwriter tries to simulate the market process and find the market-
clearing price. The dynamic book building process is able to include both negative and positive feedback
from investors about the underwriter’s pricing deliberations (Jenkinson and Ljungqvist, 2001). While the
book building is in process, investors may already commit to buy shares in the IPO, revealing even more
information to the underwriters. This commitment and revelation of private information has to be
rewarded by underwriters, otherwise investors will not cooperate (Benveniste and Spindt, 1989). This
compensation for being truthful can either come from underpricing or additional allocation of shares. As
the final allocation of shares is at the underwriter’s discretion, cooperating investors can easily be
rewarded and free riding is not worthwhile. In addition, book building allows controlling information
expenditures and thus reducing underpricing and aftermarket volatility (Sherman, 2005).
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 4/15
Book building has therefore evolved as the dominating method for going public, although it has been
criticized to entail various drawbacks (Jagannathan and Sherman, 2006). For instance, agency conflicts
arise since the underwriting investment banks have an incentive to increase underpricing in order to
reduce their underwriting risk (Adams, Thornton and Hall, 2008). Moreover, investors can induce
underwriters to excessive underpricing by offering them side payments via higher trading commissions
(Ljungqvist, 2007). Despite those agency issues, book building still seems to offer the most benefits to
shareholders.
In contrast to book building, auctions are not subject to agency problems and they have demonstrated
to allocate assets efficiently in various settings. However, auctioning is troublesome for IPOs since
companies going public are difficult to value and a large uncertainty exists about the number of bidders
(Sherman, 2005). For instance, auctions face free rider problems if information about the value of the
IPO is costly. If investors are not rewarded for their information acquisition, they will ultimately leave the
market. Furthermore, common value auctions give raise to the winner’s curse. If the number of bidders
is unexpectedly high, the IPO is likely to be oversubscribed and overpriced, while an unexpectedly low
participation will lead to undersubscription (Jagannathan and Sherman, 2006). As a result, auctions are
not the optimal method, which is empirically supported by its low application in the IPO process.
In a fixed-price IPO, the offer price is set by the underwriter prior to share requests from investors. If the
IPO is oversubscribed, the shares are allocated on a pro rata or lottery basis. Thus, investors do not have
an incentive to reveal their private information to the underwriter, who has less information about
pricing the offer. Due to higher uncertainty about investors’ valuation and demand, underpricing should
be higher in fixed-price offers than book building (Ritter, 2003).
3. Asymmetric Information
One string of explanations for IPO underpricing focuses on asymmetric information between the three
parties involved: issuing company, underwriter, and potential investors (both informed and
uninformed). In the asymmetric information setting, one party is supposed to have superior information.
Furthermore, the incentives between the parties vary substantially. For instance, the issuer is more likely
to overestimate the value of the company (e.g. by hiding negative information to outsiders). In doing so,
they can obtain higher offer prices and avoid leaving the money on the table (Benveniste and Spindt,
1989). In contrast, informed investors have no incentives to reveal their private positive information
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 5/15
about the company in order to benefit from lower initial offer prices. Uninformed investors trade on
noise and are thus more likely to participate in both high and low quality IPOs. However, if they cannot
at least break even, they will ultimately leave the market and reduce market demand below required
levels (Adams, Thornton and Hall, 2008). Agency problems concerning the underwriters have already
been discussed section 2. Generally, issuers try to align underwriters’ incentives by tying underwriting
fees to the IPO proceeds (usually 7%). Therefore, underwriters suffer from underpricing, i.e. receive
lower commissions. However, both the issuer and the underwriter do not want undersubscription,
which induces them to set a lower offer price (see Appendix B for a summary of expectations each party
holds in the IPO process).
3.1. Information Revelation
As mentioned above, the book building process aims to extract the investors’ private information in
order to find the market’s willingness to pay for the IPO. Although investors will voluntarily reveal
negative private information about the company to lower the initial price, they have an incentive to
conceal their positive information. Lowry and Schwert (2004) confirm this inference, finding that public
information is fully reflected in the offer price while private information is only partially incorporated.
However, investors’ private information is essential in finding the optimal offer price. Benveniste and
Spindt (1989) show that book building can be a mechanism to induce investors to reveal their
information truthfully. The underwriter starts the book building process by proposing an initial price
range for the IPO and goes on a road show. As the investors indicate their interests for shares, the
underwriter can draw conclusions about the investors’ willingness to pay and set the final offer price
accordingly. Yet, the underwriter has to reward the investors, who reveal positive information by
bidding aggressively. First, underwriters only partially adjust the filed price range upward to the
indicated positive information, i.e. underprice the stock (Ritter, 2003). Hanley (1993) finds empirical
evidence for underpricing by partial adjustment. She documents that offer price revisions of the
preliminary prospectus coincides with higher underpricing. Second, underwriters assign
disproportionately large allocations of shares to investors who reveal positive information. Meanwhile
the underwriter allocates less or no shares to the investors who conceal positive information by bidding
conservatively (Benveniste and Spindt, 1989). Therefore, investors have a strong incentive to
communicate their private positive information to the underwriter and underpricing is the reward for
truth-telling investors. We will model this inference by applying game theory.
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 6/15
Game Theory of Information Revelation1
Underwriters typically face the issue of not knowing whether investors have revealed all of their private
information. In addition, investors might have different opinions on revealing their information to the
underwriter. Therefore, information revelation may not be the only equilibrium in a single game setting.
However, repeated participation in the IPO process will ultimately force all investors to reveal their
positive private information about the issuing company as underwriters have the power to exclude
untruthful investors from future IPOs.
Suppose investor A and investor B (illustrated in the table) have two choices: reveal positive information
to the underwriter or conceal. If both investors choose to reveal, they face a higher offer price but
receive higher underpricing to reward their cooperation (10/10). If both investors choose not to reveal
their private information, they face a lower offer price and thus get a higher payoff (15/15). If one party
chooses to reveal and the other does not, the one who reveals gets a higher payoff (12) as more shares
are allocated to her and the other investor receives no shares and thus a payout of zero. If investors
make the same choice, the underwriter cannot detect if all private information has been revealed.
However, if investors differ in their choice, the underwriter will reward the investor who reveals her
information with additional shares and punish the other investor by assigning him no shares.
Investor B: Reveal Investor B: Not Reveal
Investor A: Reveal 10/10 12/0
Investor A: Not Reveal 0/12 15/15
Table 1: Payoff Matrix for Information Revelation.
As a result, in the single game setting there are two equilibria: either both of them choose to reveal or
both of them choose not to reveal. This means that investors’ bidding strategy is dependent on other
investors’ decision to maximize her individual interest. The game above has another important
implication. If there is only a single game, investors get the highest payoffs from both choosing not to
reveal their private information. This comes at the expense of the issuing company, which will price its
stock at a lower level when investors do not communicate any positive information.
1 This section builds on the idea of game theory according to Fudenberg and Tirole (1991).
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
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In reality, the underwriter “forces” the investors into the revelation equilibrium for several reasons.
First, informed investors are regular game players who repetitively participate in IPOs. The underwriter
can identify investors’ behavior by observing the stock price in the aftermarket. Therefore, the
underwriter can decide to exclude untruthful investors from future IPOs (i.e. changing all payoffs for not
revealing information to zero). As investors want to participate in attractive future IPOs, they will tend to
reveal their information. Second, informed investors will reveal reliable information, as they do not want
to deteriorate their reputation. Independent and objective valuations are valuable for underwriters in
finding the best offer price, while the provision of unreliable information will ultimately be detected and
underwriters will punish those investors. Therefore, investors have an incentive to avoid free riding and
deliver independent valuations to the best of their knowledge. As a result, investors tend to reveal
positive and reliable information as their optimal choice (Ljungqvist, 2007).
3.2. Adverse Selection
In addition to the information revelation, the winner’s curse can help to explain IPO underpricing. Rock
(1986) studies the winner’s curse by setting up an asymmetric information model. He assumes that
investors can be divided in two groups: informed and uninformed investors. While informed investors
have superior information about the true value of the issuing company, the uninformed investors have
less valuable information. Thus, informed investors will stay away from weak IPOs and only bid for
attractive offerings. In contrast, uniformed investors bid indiscriminately. As a result, uninformed
investors face the winner’s curse: they will overpay in unattractive IPOs. In addition, uninformed
investors will only receive a small fraction of the desirable offerings since they have to share the gains
with the informed investors. Hence, uniformed investors will receive a return below the average
underpricing (Ritter, 2003).
If the expected returns for uniformed investors become negative, they will eventually withdraw from the
IPO market, leaving only informed investors. Rock (1986) assumes that the participation of uninformed
investors is essential for the primary market since demand from informed investors is insufficient to sell
out (even the most attractive) offerings. However, Ljungqvist (2007) agrees to this assumption and
shows a market of only informed investors is not in equilibrium. If all investors are informed, only
attractive IPOs will take place while all others fail. With a single uninformed investor, unattractive
offerings would still lack demand and fail. Thus, the uninformed investor can free ride on the other
market participants, who face the cost of information acquisitions. Hence, free riding is a profitable
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 8/15
strategy in the world of informed investors and more investors are induced to stay uninformed.
However, in a world of uninformed investors it pays to become informed and omit unattractive IPOs.
Consequently, both informed and uninformed investors exist in equilibrium and the excess return of
informed over uninformed investors should equal the cost of information acquisition. The existence of
uniformed investors, who realize below average returns, and the necessity to have sufficient demand
require all IPOs to be underpriced in expectation, turning uninformed investors’ returns non-negative.
However, the individual issuing company does not have a strong incentive to contribute to the long-term
viability of the IPO market. As going public is a one-off event, the single company benefits from reduced
underpricing while issuing companies collectively gain from underpricing. In order to avoid free riding,
underwriters, who recurrently participate in the IPO process, ensure sufficient underpricing to reduce
the winner’s curse for investors (Jenkinson and Ljungqvist, 2001). Moreover, the book building process
can used to reduce the winner’s curse even further. Underwriters can reward participation in weak IPOs
with subsequent larger allocations in more attractive deals. This intertemporal pooling improves the
average return for those investors and therefore, reduces the need for underpricing (Ritter, 2003).
4. Behavioral Explanations
While asymmetric information can explain, why IPOs should generally be underpriced, the concepts
discussed in section 3 have trouble explaining high degrees of observed underpricing and its high
variation over time (Ljungqvist, 2007). Figure 1 shows particularly large underpricing during the dotcom
boom between 1999 and 2001 with average underpricing exceeding 50%. Therefore, we turn to
behavioral concepts in order to explain excessive underpricing.
4.1 Investor Sentiment and Informational Cascades
Investor sentiment is referred to as the overall belief or attitude of investors toward a security or the
financial market as a whole. This belief may be excessively optimistic or pessimistic for people with
positive and negative sentiments respectively (Bower, 1981 and 1991). Hence, investors’ choices may
not always be governed by information on hand, driving prices away from fundamentals. The latter can
particularly be observed in IPOs since companies going public are typically young, immature, and lack
total information transparency, resulting in difficulties to determine fair value (Ljungqvist, 2007). In
“hot” markets, sentiment investors seems to heavily overstate valuations and cause stocks to surge
during the first trading days. However, the sentiment will eventually fade and stocks revert to their
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 9/15
fundamental value, resulting in poor long-term performance of IPOs (Ljungqvist, Nanda, and Singh,
2006). The opposite is true for cold markets. Yet, companies rather choose to defer their IPO than going
public in a pessimistic market environment, providing unfavorable valuations. As a result, companies try
to time their IPOs in order to capture the excessive valuations during boom times while passing over
recessions (Baker and Wurgler, 2000).
Ljungqvist, Nanda, and Singh (2006) develop a model of optimal response in the presence of sentiment
investors when going public. The issuing company tries to maximize the excess valuation over the
fundamental value of the stock, by capturing the optimistic view of sentiment investors about the
company’s future prospects. Instead of flooding the market with stock and suppress prices, the issuer
should hold back shares and continuously release small portions in order to avoid share prices from
falling. This allows the company to ride the upward trend. However, the stock will eventually revert to its
fundamental value. The resulting long-term underperformance has been documented in various
empirical research (Ljungqvist, 2007). If regulatory constraints prevent the issuer from directly exploiting
this strategy, he can do so via regular investors, who resell the shares to sentiment investors. In such a
scenario, regular investors realize gains from trading with sentiment investors and thus, the offer price
will still be higher than the fundamental value to the benefit of the issuer (Ljungqvist, Nanda, and Singh,
2006).
Investor sentiment increases underpricing if positive sentiment causes the stock to overshoot and close
above the fundamental value during the first trading day while the opposite holds true for negative
sentiment. However, issuers time their IPO in order achieve more favorable valuations and sell at higher
prices. Thus, investor sentiment usually results in higher underpricing.
In addition to the overall market sentiment, informational cascades can cause prices to deviate from
fundamentals. The occurrence of such cascades is hence another explanation to the underpricing
phenomenon. Market sentiment develops over time while informational cascades can spontaneously
emerge without the appearance of any relevant information. Those cascades occur when investors base
their investment decisions on the observed behavior of other investors instead of trading on their
original information (Welch, 1992). Despite having favorable information about a company’s stock, an
investor may omit an investment if he observes that other investors choose not to buy the stock.
Consequently, cascades rely on positive feedback mechanisms, which can affect the IPO process (Ritter,
2003).
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
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From the issuer’s perspective, a positive cascade is desirable while a negative cascade can be
devastating. In order to start a positive cascade, the issuer can artificially reduce the initial offer price to
encourage purchases. Once investors have started to purchase, a cascade will unfold where all the later
investors will buy the stock regardless of their initial information about the company. Hence, successful
initial sales signal favorable information to other investors and induce them to disregard their own
information. However, the opposite can occur if initial sales are slow. As a result, demand either surges
or collapses in the IPO (Ljungqvist, 2007).
Similar to market sentiment, positive informational cascades will lead to higher closing prices, above the
fundamental value. Therefore, observed underpricing increases in the presence of informational
cascades. Yet, issuers also have an incentive to reduce the offer price (i.e. underpricing) in order to
increase the likelihood of a positive cascade. Concisely, investor sentiment and informational cascades
can explain the very high degrees of underpricing if enough irrational exuberance prevails in the market.
4.2. Prospect Theory
While the paragraph above has covered investors’ irrationalities, the prospect theory helps to
understand why the decision makers may agree to severe underpricing and leave money on the table. By
linking reference-point preferences with mental accounting, Loughran and Ritter (2002) explain the
shareholders’ fallacy when calculating their change in wealth. The authors argue that shareholders use
the midpoint of the initial price range in the preliminary prospectus as a reference point for their
potential gains. Then they evaluate their accumulated first-day gains and losses against the reference
point. As shareholders usually retain most of their shares, they experience a substantial increase in
wealth in the aftermarket while the loss from dilution and selling own shares is marginal.
We provide an example to illustrate the prospect theory explanation. We assume that a company has a
single shareholder owning 100,000 shares (100%). The initial price range in the prospectus is $15-25 and
we use the midpoint ($20) for the calculations. In the IPO, the company sells 10,000 share at the offer
price of $20 per share and creates 20,000 new shares. Thus, the original shareholders retains 90,000
shares (a 75% stake post-IPO). Initially, the shareholder estimates her wealth to $2,000,000. After the
IPO, the equity value amounts to $2,700,000 (=$30*90,000 shares). In addition, she receives $200,000 in
cash for selling 10,000 shares. Her losses come from selling her shares at a low price ($30-$20)*10,000 =
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 11/15
$100,000 and dilution ($30-$20)*20,000 = $200,000. In total, her wealth has increased by $600,000
although she has left $300,000 on the table.
Prospectus Price Range Aftermarket
Share Price $20 (midpoint) $30 (first day closing price)
Shares Retained 100,000 90,000
Share Sold 10,000
New Shares 20,000
Equity Value $2,000,000 $2,700,000
Cash Proceeds 200,000
Loss from Sale $(100,000)
Dilution $(200,000)
Total Wealth $2,000,000 $2,600,000
Table 2: Prospect Theory and Shareholder Wealth.
Prospect theory can explain, why this shareholder is satisfied with 50% underpricing and leaving
$300,000 on the table. Furthermore, prospect theory makes an argument for experiencing higher
underpricing. If decision makers use the initial price range as a reference and do not adjust it upward,
underwriters can exploit this behavior by setting artificially low price ranges and thus increase
underpricing. Additionally, prospect theory reveals why offer price only partially adjust to market
fluctuations during the book build process. Since decision-makers see their wealth increasing, they
bargain less hard to achieve a higher offer price (Ljungqvist, 2007).
5. Conclusion
In this paper, we compiled the most relevant explanations for underpricing. However, in academic
literature various alternative explanations can be found, which are beyond the scope of our discussion.
For instance, institutional frictions and explanations relying on the retention of ownership and control
have been deliberately omitted as asymmetric information and behavioral concepts seems to have the
largest influence on the degree of underpricing.
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 12/15
We started our discussion with a short review about the IPO methods. By combining the three IPO
methods with asymmetric information models, book building has demonstrated to serve all IPO
participants the best.
Then we focused our attention on asymmetric information models, which seems to have a first-order
effect on underpricing. In order to have a successful IPO, underwriters need to make sure to have i)
enough demand and ii) set an appropriate price. The discussed concepts address those very points. The
winner’s curse explains why underpricing is necessary in order to generate sufficient demand. The IPO
market relies on both informed and uninformed investors. However, uniformed investors are at a
disadvantage in selecting IPOs and leave the IPO market if they experience continuously negative
returns. Therefore, IPOs have to be underpriced in the first place. In contrast, information revelation is
needed to price IPOs appropriately. Informed investors have an incentive not to share their positive
private information with the underwriter. If the underwriter wants to extract these valuable pieces of
information, investors have to be offered a reward, i.e. underpricing. In short, underpricing is a
requirement in order to go public and the money left on the table can be interpreted as indirect costs in
the IPO process.
While asymmetric information models explain why IPOs should be priced below their fundamental
value, behavioral biases generate valuable insights into why IPOs tend to close above fundamentals. By
timing the IPO and inducing a positive informational cascade, issuers can realize extreme first day
returns. However, prices will ultimately revert to the fundamental value. As the underpricing associated
with behavioral biases relates to excessive valuations during the first trading day, shareholders are
hardly able to capture those. Setting higher offer prices may prevent positive cascades from occurring or
even induce negative ones. Thus, shareholders do not seem to leave money on the table, as they cannot
exploit the irrational exuberance in the IPO process. Finally, prospect theory is another explanation why
shareholders are not upset about high initial returns. Since they retain most of shares, shareholders’
total wealth usually increases during the first trading day compared to their reference point.
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
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References
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Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
HULT INTERNATIONAL BUSINESS SCHOOL San Francisco Campus | 1355 Sansome Street San Francisco, CA 94111 14/15
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Appendix
Appendix A
Figure 2: Initial IPO returns in Europe, 1990 to 2003.
Source: Ljungqvist (2007), p. 383.
Moritz Grahm, Buenyamin Oezyuerek, Tiancheng Tian and Rajil Shah Behavioral Finance Gregory Lablanc
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Appendix B
Players Expectations
Issuing company High price, sell out shares
Underwriter High price, no undersubscription
Informed Investors Low price, high allocation of shares
Uninformed Investors Low price, break even over sequential IPOs
Table 3: IPO parties and their expectations.