Industrial Diversification and Underpricing of Initial Public Offerings


  • Thomas J. Boulton,

  • Scott B. Smart,

  • Chad J. Zutter

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    • Thomas J. Boulton is an Assistant Professor of Finance at the Farmer School of Business at Miami University in Oxford, OH. Scott B. Smart is the Whirlpool Finance Faculty Fellow at the Kelley School of Business at Indiana University, Bloomington, IN. Chad J. Zutter is the Joseph P. and Angela A. Campolo Faculty Fellow and an Associate Professor of Business Administration at the Katz Graduate School of Business at University of Pittsburgh, Pittsburgh, PA.

  • For valuable comments, the authors express their thanks to Bill Christie (Editor), an anonymous referee, Heng An, Seth Anderson, Scott Bauguess, Kelly Brunarski, Ryan Casey, Kam Chan, Kathleen Weiss Hanley, Terry Nixon, David Shrider, Shawn Thomas, Steve Wyatt, and seminar participants at Baylor University, Miami University, University of Cincinnati, the 2008 Eastern Finance Association meetings, and the 2010 Financial Management Association meetings. Any remaining errors or omissions remain the responsibility of the authors.


The initial public offerings (IPOs) of diversified firms, those reporting more than one business segment at the time they go public, experience less underpricing than do IPOs by focused issuers. We explore two explanations for this phenomenon. Diversification may benefit IPO firms by reducing information asymmetries and therefore, lowering underpricing costs. Alternatively, high quality focused firms may be signaling their value by underpricing their shares to a greater degree. Though we find at least some evidence consistent with each explanation, a majority of the evidence favors signaling.