Are IPOs Underpriced?

1
Are IPOs Underpriced?

• Discussion by Ayako Yasuda

2
Central Question

• Information Asymmetry textbook explanation for
  IPO underpricing
• Money Left on the Table during Internet Bubble
• Flipping/Kickbacks
• gt Do underpricing and undervaluation mean the
  same thing?
• ? Are IPO markets efficient?

3
Two Theory Camps

• Efficient Market
• Grinblatt and Hwang(1989) Signaling
• gt The more undervaluation, the higher
  first-day return
• 2. Inefficient Market
• Daniel et al.(1998) Overconfidence
• gt The more overvaluation, the higher
  first-day return

4
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
• gt Support inefficient markets, or behavioral
  theories of investor overconfidence

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Other Empirical Findings

• IPO stocks dont 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

6
Remaining Questions

• Why would any institutional investors buy any IPO
  stock?
• If IPO markets have been inefficient, will the
  inefficiency necessarily persist?