IPO underpricing: A social comparison perspective

This paper studies a social comparison perspective on IPO underpricing. The social comparison theory in behavioral psychology suggests that when people do not know how to make a decision or are exposed to new information, they refer to the behavioral norm of the public or the behavior of others to frame their decisions. I argue that when IPO firms and underwriters are uncertain about an IPO firm's intrinsic values, they refer to similar IPO issuing firms in the same industry that went public earlier to determine the IPO offer price. Using a sample of Taiwan IPOs, I find evidence that supports the social comparison explanation of IPO underpricing.