Underpricing, Overhang, and the Cost of Going Public to Preexisting Shareholders

Authors

  • Steven D. Dolvin,

    1. The authors are respectively from the College of Business Administration, Butler University and the Gatton College of Business and Economics, University of Kentucky.
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  • Bradford D. Jordan

    Corresponding author
    1. The authors are respectively from the College of Business Administration, Butler University and the Gatton College of Business and Economics, University of Kentucky.
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  • They thank Jack Cooney, Dick Pettway, Jay Ritter, an anonymous referee, Martin Walker (editor), and seminar participants at Texas Tech University, the University of Florida, and the 2005 FMA Annual Meeting for helpful comments. Founding dates used in this study are supplied by Laura Field and Jay Ritter.

* Address for correspondence: Steven D. Dolvin, Butler University, College of Business Administration, 4600 Sunset Avenue, Indianapolis, IN 46208, USA.
e-mail: sdolvin@butler.edu

Abstract

Abstract:  IPO underpricing has been extensively studied; however, its impact on the wealth of preexisting shareholders has not been closely examined. We address the question of whether or not periods of high underpricing adversely affect preexisting shareholders. We find that high levels of underpricing are associated with increased share retention, which effectively offsets much of the potential cost. Overall, we find that the percentage of shareholder wealth lost is surprisingly stable over time, unlike underpricing itself. We also find that many factors known to be related to underpricing are not significant determinants of the cost of going public to preexisting owners.

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