We are grateful for comments and suggestions from David Emanuel and Peter Verhoeven, participants at seminars at the University of Auckland and the University of Melbourne, and the 2005 AFAANZ Conference, and two anonymous referees.
Incentives to underprice
Article first published online: 12 OCT 2006
Accounting & Finance
Volume 46, Issue 4, pages 537–551, December 2006
How to Cite
Camp, G., Comer, A. and How, J. C. Y. (2006), Incentives to underprice. Accounting & Finance, 46: 537–551. doi: 10.1111/j.1467-629X.2006.00182.x
- Issue published online: 12 OCT 2006
- Article first published online: 12 OCT 2006
- doi: 10.1111/j.1467-629x.2006.00182.x; Received 23 December 2003; accepted 23 August 2005 by Robert Faff (Editor).
- Compensatory benefits;
- Initial public offering;
- Wealth losses
In an initial public offering, the choices made by issuers, such as the offer price, might not appear to be wealth maximizing. In this article, we argue that the choices are strategic. Based on the model developed by Barry (1989), we show that the average change in the issuer's wealth (4.52 per cent) is lower than the average loss implied by underpricing (12.09 per cent). Our results support the notion that the choices issuers make at the offering generate a compensatory benefit in the aftermarket. That the issuer may well not suffer a net wealth loss from the offering is in accordance with continued initial public offering activity.