Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-07T01:55:19.614Z Has data issue: false hasContentIssue false
  • English
  • Français

The Effect of the Secondary Market on the Pricing of Initial Public Offerings: Theory and Evidence

Published online by Cambridge University Press:  06 April 2009

David C. Mauer  and
Lemma W. Senbet
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper provides a theoretical and empirical investigation of the role of the secondary market in the pricing of initial public offerings. We argue that incomplete spanning of the primary issues in the secondary market and limited investor access play an important role in the pricing of initial public offerings. Utilizing a segmented market approach wherein IPO offering values are determined in the primary market and after-market bid prices are determined in the centrally accessed secondary market, we derive a price differential in the primary and secondary markets that is consistent with the received notion of IPO underpricing. Empirical tests on a large sample of IPOs provide results that are consistent with the predictions of our theoretical analysis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 1 , March 1992 , pp. 55 - 79
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Allen, F., and Faulhaber, G. R.. “Signalling by Underpricing in the IPO Market.” Journal of Financial Economics, 23 (08. 1989), 303–323.CrossRefGoogle Scholar
Baron, D. P. “A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues.” Journal of Finance, 37 (09. 1982), 955–976.CrossRefGoogle Scholar
Barry, C. B. “Initial Public Offering Underpricing: The Issuer's View-A Comment.” Journal of Finance, 44 (09. 1989), 1099–1103.Google Scholar
Beatty, R. P., and Ritter, J. R.. “Investment Banking, Reputation, and the Underpricing of Initial Public Offerings.” Journal of Financial Economics, 15 (03 1986), 213–232.CrossRefGoogle Scholar
Benveniste, L. M., and Spindt, P. A.. “How Investment Bankers Determine the Offer Price and Allocation of New Issues.” Journal of Financial Economics, 24 (10. 1989), 343–361.CrossRefGoogle Scholar
Chemmanur, T. “The Pricing of Initial Public Offerings: A Dynamic Model with Information Production.” Working Paper, Columbia Univ. (1989).Google Scholar
Dawson, S. M. “Initial Public Offer Underpricing: The Issuer's View-A Note.” Journal of Finance, 42 (03 1987), 159–162.Google Scholar
Dimson, E. “Risk Measurement When Shares are Subject to Infrequent Trading.” Journal of Financial Economics, 7 (06 1979), 197–226.CrossRefGoogle Scholar
Errunza, V. R., and Losq, E.. “International Asset Pricing Under Mild Segmentation: Theory and Test.” Journal of Finance, 40 (03 1985), 105–124.CrossRefGoogle Scholar
Errunza, V. R., and Losq, E.. “Capital Flow Controls, International Asset Pricing and Investors' Welfare: A Multi-Country Framework.” Journal of Finance, 44 (09. 1989), 1025–1037.Google Scholar
Glenn, D. “Super Premium Security Prices and Optimal Corporate Financing.” Journal of Finance, 32 (05 1976), 479–492.Google Scholar
Gordon, J. N. “The Puzzling Persistence of the Constrained Prudent Man Rule.” New York University Law Review, 62 (04 1987), 52–114.Google Scholar
Grinblatt, M., and Hwang, C. Y.. “Signalling and the Pricing of New Issues.” Journal of Finance, 44 (06 1989), 393–120.CrossRefGoogle Scholar
Guenther, A. E. “The Pricing of Best Efforts New Issues.” Journal of Finance (forthcoming 1992).Google Scholar
Ibbotson, R. G. “Price Performance of Common Stock New Issues.” Journal of Financial Economics, 2 (09. 1975), 235–272.CrossRefGoogle Scholar
Ibbotson, R. G., and Jaffe, J. F.. “Hot Issue Markets.” Journal of Finance, 30 (09. 1975), 1027–1042.Google Scholar
Ibbotson, R. G.; Sindelar, J. L.; and Ritter, J. R.. “Initial Public Offerings.” Journal of Applied Corporate Finance, 1 (Summer 1988), 371–5.CrossRefGoogle Scholar
Investment Dealers' Digest, Corporate Financing Directory. Marcusson, P. A., New York (1973-1984).Google Scholar
Koh, F., and Walters, T.. “A Direct Test of Rock's Model of the Pricing of Unseasoned Issues.” Journal of Financial Economics, 23 (08. 1989), 251–272.CrossRefGoogle Scholar
Lintner, J. “Expectations, Mergers and Equilibrium in Purely Competitive Securities Markets.” American Economic Review, 61 (05 1971), 101–111.Google Scholar
Logue, D. “On the Pricing of Unseasoned Equity Issues, 1965–69.” Journal of Financial and Quantitative Analysis, 8 (01. 1973), 91–104.CrossRefGoogle Scholar
Longstreth, B.Modern Investment Management and the Prudent Man Rule. New York: Oxford Univ. Press (1986).Google Scholar
Merton, R. C. “A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (07 1987), 483–510.CrossRefGoogle Scholar
Muscarella, C. J., and Vetsuypens, M. R.. “A Simple Test of Baron's Model of IPO Underpricing.” Journal of Financial Economics, (09. 1989a), 125–135.CrossRefGoogle Scholar
Muscarella, C. J., and Vetsuypens, M. R.. “The Underpricing of ‘Second’ Initial Public Offerings.” Journal of Financial Research, 12 (Fall 1989b), 183–192.CrossRefGoogle Scholar
Ritter, J. R. “The ‘Hot Issue Market’ of 1980.” Journal of Business, 57 (04 1984), 215–239.CrossRefGoogle Scholar
Muscarella, C. J., and Vetsuypens, M. R.. “The Long Run Performance of Initial Public Offerings.” Journal of Finance, 46 (03 1991), 3–27.Google Scholar
Rock, K. “Why New Issues are Underpriced.” Journal of Financial Economics, 15 (01/02. 1986), 187–212.CrossRefGoogle Scholar
Ross, S. A. “A Simple Approach to the Valuation of Risky Streams.” Journal of Business, 51 (07 1978), 453–75.CrossRefGoogle Scholar
Rubinstein, M. E. “Corporate Financial Policy in Segmented Securities Markets.” Journal of Financial and Quantitative Analysis, 8 (12. 1973), 749–761.CrossRefGoogle Scholar
Schipper, K., and Smith, A.. “A Comparison of Equity Carve-Outs and Seasoned Equity Offerings: Share Price Effects and Corporate Restructuring.” Journal of Financial Economics, 15 (01/02. 1986), 153–186.CrossRefGoogle Scholar
Shiller, R. J. “Initial Public Offerings: Investor Behavior and Underpricing.” NBER Working Paper 2806 (1988).CrossRefGoogle Scholar
Simon, C. J. “The Role of Reputation in the Market for Initial Public Offerings.” Working Paper, Univ. of California, Los Angeles (1989).Google Scholar
Stulz, R. “On The Effects of Barriers to International Investment.” Journal of Finance, 36 (09. 1981), 923–934.CrossRefGoogle Scholar
Tinic, S. M. “Anatomy of Initial Public Offerings of Common Stock.” Journal of Finance, 43 (09. 1988), 789–822.CrossRefGoogle Scholar
Welch, I. “Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings.” Journal of Finance, 44 (06 1989), 421–449.CrossRefGoogle Scholar