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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?