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Why Has Ipo Underpricing Increased over Time

In: Business and Management

Submitted By weberxia
Words 13928
Pages 56
Why Has IPO Underpricing Increased Over Time?

Tim Loughran
University of Notre Dame
P.O. Box 399
Notre Dame IN 46556-0399
219.631.8432 voice
Loughran.9@nd.edu
and
Jay R. Ritter
University of Florida
P.O. Box 117168
Gainesville FL 32611-7168
352.846.2837 voice ritter@dale.cba.ufl.edu http://bear.cba.ufl.edu/ritter

March 18, 2002

We wish to thank Hsuan-Chi Chen, Craig Dunbar, Todd Houge, Josh Lerner, Alexander
Ljungqvist, Donghang Zhang, two anonymous referees, and seminar participants at Boston
College, Southern Methodist University, Texas Christian University, and the Universities of
Colorado, Houston, Illinois, Indiana, Iowa, Notre Dame, and Pennsylvania for useful comments.
Chris Barry, Laura Field, Paul Gompers, Josh Lerner, Scott Smart, Li-Anne Woo, and Chad
Zutter generously provided IPO data. Bruce Foerster assisted us in ranking underwriters.
Underwriter ranks are available online at http://bear.cba.ufl.edu/ritter/rank.htm. Donghang
Zhang supplied useful research assistance.

Why Has IPO Underpricing Increased Over Time?

Abstract
In the 1980s, the average first-day return on initial public offerings (IPOs) was 7%. The average first-day return doubled to almost 15% during 1990-1998, before jumping to 65% during the internet bubble years of 1999-2000. Part of the increase can be attributed to changes in the composition of the companies going public. We attribute much of the increase in underpricing, however, to previously latent agency problems between underwriters and issuing firms. We argue that the increase in valuations over time has caused issuers to be more complacent about leaving money on the table.
Keywords: Initial public offerings; agency problems; internet bubble; underwriter reputation

1

1. Introduction
What explains the severe underpricing of initial public offerings in 1999-2000, where the

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