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Are IPOs Underpriced?

Are IPOs Underpriced?. Discussion by Ayako Yasuda. 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?

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Are IPOs Underpriced?

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  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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