Why Don’t Issuers Get Upset About Leaving Money on the Table in IPOs?

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ID: 294636
2002
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Abstract
One of the puzzles regarding initial public offerings (IPOs) is that issuers rarely get upset about leaving substantial amounts of money on the table, defined as the number of shares sold times the difference between the first-day closing market price and the offer price. The average IPO leaves $9.1 million on the table. This number is approximately twice as large as the fees paid to investment bankers and represents a substantial indirect cost to the issuing firm. We present a prospect theory model that focuses on the covariance of the money left on the table and wealth changes. Our reasoning also provides an explanation for a second puzzling pattern: much more money is left on the table following recent market rises than after market falls. This results in an explanation of hot issue markets. We also offer a new explanation for why IPOs are underpriced.
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openalex_W3126029451 Use this key to autocite in the manuscript while using SciMatic Manuscript Manager or Thesis Manager
Authors Tim Loughran, Jay R. Ritter
Journal review of financial studies
Year 2002
DOI
10.1093/rfs/15.2.413
URL
https://doi.org/10.1093/rfs/15.2.413
Keywords Keywords not found

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