Initial public offerings and underwriter reputation

Article Abstract:

This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of "informed" activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns. (Reprinted by permission of the publisher.)

Finance, Stockbrokers, Corporations, Corporate finance

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The pricing of best efforts new issues

Article Abstract:

This paper offers an axplanation for the underpricing of best efforts new issues and demonstrates that best efforts contracts allow issuers to use information from the market. If investors obtain information which indicates that a project will not be profitable, their demand will be low and the offering will be withdrawn. If this information is costly, investors will have to be compensated for its purchase through a lower offering price, which means that issuers will have to underprice. This result is consistent with the empirical observation that underpricing is considerably greater for best efforts than for firm commitment contracts. (Reprinted by permission of the publisher.)

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The informational content of initial public offerings

Article Abstract:

The ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once. A model is developed in which there is price risk from holding equity between periods. When the uncertainty is small, there must be pooling in the first period. When uncertainty is large, the pooling equilibria dominate the separating equilibrium. (Reprinted by permission of the publisher.)

Capital

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