Information Collection and IPO Underpricing

Abstract

This study provides new evidence that IPO underpricing is economic rents paid for investor to gather costly information. Subrahmanyam and Titman (1999) report that diverse investor information, once aggregated in the public market, could provide a more informative stock price and accurate feedback to firm’s investment decision. I investigate the hypothesis that IPO underpricing as economic rents could be higher, when investor information is diverse. In support of this hypothesis, I find a positive and significant correlation between the extent of underpricing and the information diversity measure proposed by Barron et al. (1998). There is a positive and significant correlation between this information diversity measure and an IPO firm’s subsequent (absolute) change in capital and R&D expenditures. In addition, firms with high information diversity measure and change in subsequent investment exhibit a better subsequent return performance than firms with low diversity and change in investment. This is consistent with the proposition that investor information serves as useful feedback for managers in the IPO market. Copyright Springer Science+Business Media, Inc. 2005IPO underpricing, information production, information diversity,

Does idiosyncratic risk matter in IPO long-run performance?

“…Hence, the informational disparity between issuers and investors, on the one hand, and informed investors and uninformed investors, on the other, is primarily due to lack in accessing specific information about the new issue. In this context, Guo (2005) emphasizes the role of the investor information that provides useful feedback for managers in the IPO market.…”

Shareholder wealth effects of M&A withdrawals

“…Some previous studies provide empirical evidence on this feedback effect in the context of IPOs and share repurchases. For example, Bommel (2002) and Guo (2005) suggest that a high/low IPO's initial return leads managers to increase/decrease the capital budget. Chen et al (2009) also find that the initial market reaction to the share repurchase announcement has a significant impact on managers' later repurchasing behaviors.…”

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