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Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings



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    • School of Business, University of Chicago. I am grateful for the support and encouragement of Randolph Beatty, Sandra Chamberlain, Jennifer Dropkin, Robert Gertner, Milton Harris, Mark Lang, Albert Madansky, Peter Pashigian, John Persons, Jay Sankaran, Robert Vishny, the participants of the Workshop of Economics and Econometrics at the University of Chicago, René Stulz (the editor), and Jay Ritter (the referee). I would also like to thank Jay Ritter and Hyuk Choe for permitting me access to their data bases. All remaining errors are my responsibility alone.


This paper presents a signalling model in which high-quality firms underprice at the initial public offering (IPO) in order to obtain a higher price at a seasoned offering. The main assumptions are that low-quality firms must invest in imitation expenses to appear to be high-quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high-quality firms at the IPO can then add sufficient signalling costs to these imitation expenses to induce low-quality firms to reveal their quality voluntarily. The model is consistent with several documented empirical regularities and offers new testable implications. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital in the years after their IPO.

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