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Underpricing and Ex Post Value Uncertainty

Authors

  • Sonia Falconieri,

    1. Sonia Falconieri is an Associate Professor in the Brunel Business School, Brunel University, Uxbridge, Middlesex, UK.
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  • Albert Murphy,

    1. Albert Murphy is an Assistant Professor in the Department of Finance and Business Economics, State University of New York, Old Westbury, NY.
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  • Daniel Weaver

    1. Daniel Weaver is an Associate Professor in the Department of Finance and Economics, Rutgers, The State University of New Jersey, Piscataway, NJ.
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  • We thank the anonymous reviewer, Amber Anand, N.K. Chidambaran, Andros Gregoriou, Steven Ongena, Darius Palia, Robert Patrick, Gideon Saar, Carsten Tanggaard, Emilio Venezian, Ivo Welch, Wei Yu, Xiaoyun Yu, Maurizio Zanardi and seminar participants at Ente Einaudi (Rome), HEC Lausanne, HEC Paris, Tilburg University, University of Amsterdam, University of Milan-Bicocca, Binghamton University, Rutgers University, and the first FIRS conference “Banking, Insurance and Intermediation,” Capri (Italy) May 2004. Falconieri and Weaver gratefully acknowledge support for this project from the New York Stock Exchange. Weaver also gratefully acknowledges partial funding support for this project from the Whitcomb Center for Research in Financial Services.

Abstract

As documented by a vast empirical literature, initial public offerings (IPOs) are characterized by underpricing. A number of papers have shown that underpricing is directly related to the amount of ex ante uncertainty concerning the IPOs valuation. Recent theoretical papers propose that not all value uncertainty is resolved prior to the start of trading, but rather continues to be resolved in the beginning of the after market. We term this type of uncertainty as ex post value uncertainty and develop proxies for it. We find strong support for the existence of ex post value uncertainty and find that including a proxy for it more than doubles the explanatory power of previous models.

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