UNDERPRICING OF IPOS THAT FOLLOW PRIVATE PLACEMENT

Authors


  • We are very grateful to Jayant R. Kale (the editor) and an anonymous referee whose comments and suggestions significantly improved the paper. We would also like to thank Jean Helwege, Xuejing Xing and the conference participants of Financial Management Association annual conference (2006), Journal of Banking and Finance 30th anniversary conference, and Midwest Finance Association annual conference (2006). We are solely responsible for any remaining errors.

Abstract

In this study we examine the underpricing of initial public offerings (IPOs) by firms that have private placements of equity before their IPOs (PP IPO firms). We find that PP IPOs are associated with significantly less underpricing than their peers. Furthermore, PP IPOs are associated with lower underwriting spreads, more reputable underwriting syndicates, and greater postissue analyst coverage as compared to IPOs that are issued by their industry peers under similar market conditions. Consistent with the implications of the information asymmetry explanation for IPO underpricing, our findings suggest that companies could benefit by conveying their quality via successful pre-IPO private placements that help reduce the cost of going public.

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