Acquisition Activity and IPO Underpricing


  • The authors thank Bill Christie (editor) and the referee for helpful criticism, and Wendy Jennings for editorial assistance. We also wish to thank Oya Altinkiliç, Robert Jennings, Kenneth Lehn, Gershon Mandelker, Shawn Thomas, Frederik Schlingemann, and seminar participants at the Financial Management Association and Eastern Finance Association meetings for many helpful comments.


We propose an “M&A activity” hypothesis as a partial explanation for initial public offering (IPO) underpricing. When going public during active corporate control markets, managers may take actions to safeguard their control. In support of this conjecture, we find that pre-IPO M&A activity directly explains IPO underpricing. We also find that underpricing and ownership dispersion are positively correlated, as are ownership dispersion and the probability of remaining independent. Considering the possibility that some managers take their firms public to be acquired, we find that the positive link between M&A activity and underpricing is not robust for firms that are viewed as likely targets.