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Understanding IPO Underpricing: Insights and Analysis

Explore the dynamics of IPO underpricing, market efficiency theories, and empirical findings to understand if IPO markets are truly efficient. Delve into the implications of overvaluation, flipping, and investor behavior in IPOs.

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Understanding IPO Underpricing: Insights and Analysis

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Presentation Transcript

  1. Are IPOs Underpriced? Discussion by Ayako Yasuda

  2. Central Question • Information Asymmetry: textbook explanation for IPO underpricing • “Money Left on the Table” during Internet Bubble • Flipping/Kickbacks => Do underpricing and undervaluation mean the same thing?  Are IPO markets efficient?

  3. Two Theory Camps • Efficient Market Grinblatt and Hwang(1989): Signaling => The more undervaluation, the higher first-day return 2. Inefficient Market Daniel et al.(1998): Overconfidence => The more overvaluation, the higher first-day return

  4. Empirical Verdict • Median IPO is overvalued at the offer, not undervalued • Overvalued IPO earn higher first-day returns than undervalued IPOs • Overvalued IPOs underperform undervalued IPOs in the long-run => Support inefficient markets, or behavioral theories of investor overconfidence

  5. Other Empirical Findings • IPO stocks don’t do worse than their industry peers (Brav and Gompers) IPOs broadly undeperform • “Cold IPOs” continue to do worse then “hot” (but not extra hot) IPOs (Krigman et al.) Undervalued IPOs eventually do better • Flipping is most prevalent among extra-hot IPOs

  6. Remaining Questions • Why would any institutional investors buy any IPO stock? • If IPO markets have been inefficient, will the inefficiency necessarily persist?

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