Why Has Ipo Underpricing Changed over Time

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The paper examines three hypotheses for the change in underpricing of IPOs over four periods: 1980s, 1990-1998, bubble period of 1999-2000, and post bubble period 2001-2003, with a focus of explaining the record high level of average first-day return during the bubble period. The first hypothesis is changing risk composition hypothesis, which assumes that riskier IPOs will be underpriced by more than less-risky IPOs. The second hypothesis being the realignment of incentives hypothesis argues that manager of issuing firms will allow more underpricing for reasons including reduced CEO ownership and a higher fraction of IPOs with no secondary shares. And the third hypothesis being the changing issuer objective function hypothesis, is a newly introduced hypothesis comprising two components, one is the analyst lust hypothesis, which states that desire to hire an underwriter with influential and favorable analyst coverage makes the issuing firm willing to pay the underwriter through the indirect cost of underpricing; the other is the spinning hypothesis, which argues that the incentives for venture capitalists and executives of issuing firms is willing to accept excessive underpricing for their own company when they enjoy the side payments by the underwriter’s allocation of hot IPOs to their personal brokerage accounts. With the data available from different sources and excluding small offerings, ADRs and REITs, the means and medians of the respective return for four periods show that underpricing did not increase dramatically until the bubble period. Besides, evidence based on univariate sorts are used to test the three hypothesis, by analyzing the first-day average return on different age distribution in four periods, comparing the median CEO pre-issue market value of equity from 1996 to 2000, and comparing high with low prestige underwriters on a serial of characteristics. Furthermore, Multiple Regression is used to test the three hypotheses. The OLS regression...
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