TY - JOUR
T1 - Signaling in the Internet craze of initial public offerings
AU - Cao, Melanie
AU - Shi, Shouyong
N1 - Funding Information:
This paper is a revision of a previous paper, “Publicity and Clustering of IPO Underpricing”, which has been presented at the Western Finance Association meeting (Idaho, 2000), ABN AMRO International Conference on IPO (Amsterdam, 2000), Pacific-Basin Capital Market/Financial Management Association Meeting (Melbourne, 2000), Northern Finance Association Meeting (Waterloo, 2000), Queen's University, York University and University of Toronto. A referee and the editor of this journal provided very useful comments which led to significant improvements of this paper. We also benefited from comments by and discussions with Douglas Cumming, Francois Derrien, Deborah Lucas, Frank Milne, Jay Ritter, Ralph Winter, Kent Womack, and Kathryn Wong. Both authors gratefully acknowledge the financial support from the Social Sciences and Humanities Research Council of Canada. All errors are ours alone.
Copyright:
Copyright 2006 Elsevier B.V., All rights reserved.
PY - 2006/9
Y1 - 2006/9
N2 - We explain the clustering of underpricing in initial public offerings (IPOs). The model features an industry with aggregate demand uncertainty and asymmetric information about firms' quality. In the IPO market, firms can signal quality by underpricing or under-issuing new shares. Expected aggregate demand for the industry's products increases with the publicity that the industry creates through IPO underpricing. We show that asymmetric information and expectations on aggregate product demand interact with each other to generate multiple equilibria. Underpriced IPOs cluster in one equilibrium but not in the other. We use these results to explain why the clustering often occurs in particular industries, is short-lived, and is sensitive to economic conditions.
AB - We explain the clustering of underpricing in initial public offerings (IPOs). The model features an industry with aggregate demand uncertainty and asymmetric information about firms' quality. In the IPO market, firms can signal quality by underpricing or under-issuing new shares. Expected aggregate demand for the industry's products increases with the publicity that the industry creates through IPO underpricing. We show that asymmetric information and expectations on aggregate product demand interact with each other to generate multiple equilibria. Underpriced IPOs cluster in one equilibrium but not in the other. We use these results to explain why the clustering often occurs in particular industries, is short-lived, and is sensitive to economic conditions.
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U2 - 10.1016/j.jcorpfin.2005.11.001
DO - 10.1016/j.jcorpfin.2005.11.001
M3 - Article
AN - SCOPUS:33646777146
SN - 0929-1199
VL - 12
SP - 818
EP - 833
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
IS - 4
ER -