Are IPOs Underpriced?

Discussion by Ayako Yasuda

Central Question

1. Information Asymmetry: textbook explanation for IPO underpricing

2. “Money Left on the Table” during Internet Bubble

3. Flipping/Kickbacks

=> Do underpricing and undervaluation mean the same thing?

Are IPO markets efficient?

Two Theory Camps

1. 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

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

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

Remaining Questions

• Why would any institutional investors buy any IPO stock?

• If IPO markets have been inefficient, will the inefficiency necessarily persist?