Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7362309 | Journal of Financial Intermediation | 2017 | 16 Pages |
Abstract
Extant literature shows that IPO first-day returns are correlated with market returns preceding the issue. We propose a rational explanation for this puzzling predictability by adding a public signal to Benveniste and Spindt (1989)'s information-based framework. A novel result of our model is that the compensation required by investors to truthfully reveal their information decreases with the public signal. This “incentive effect” receives strong empirical support in a sample of 6300 IPOs in 1983-2012. Controlling for the incentive effect, the positive relation between initial returns and pre-issue market returns disappears for top-tier underwriters, where the order book is held to be most informative, effectively resolving the predictability puzzle.
Related Topics
Social Sciences and Humanities
Business, Management and Accounting
Strategy and Management
Authors
Einar Bakke, Tore E. Leite, Karin S. Thorburn,