Research On The IPO Underpricing

The puzzle of IPO underpricing which is the core of IPO underpricing research violates the hypothesis of market efficiency. Loughran and ritter(1994)believe that the IPO underpricing exists in the world. But we does not know the reason for the issuer to leave the money on the table. It is obviously that underpricing is the issuer’s cost and the value of the retained shares is diluted by the voting rights and cash flows in the future. The researcher was more puzzled by the fact that the amount of money left on the table is so huge and intense debate comes from the two theoretical perspectives:information production based on the benvenist-spindt(1989) and jay ritter’s agency cost. For the information-acquisition mechanism of benveniste and spindt to work, underwriter need the discretion being given which they can price and allocate IPO shares. However, allocation discretion may aggravate agency cost between the issuer and the underwriter..Information extraction theory is important in asymmetry information theory in IPO underpricing reserch. In fact, we have to admit the fact that information production is as important as information extraction. We begins with Baron(1982) and assume the underwriter knows the the market demand for the IPO. By solving the maximization of the issuer’s proceeds,we have the conclusion that investment bank prefer to issue the IPO shares at lower price than issuer and explain indiretly for the mechanism that agency cost leads to underpricing. Rock(1986) assumes that some investors have private information.Informed investor and uninformed investors both have zero mean payoff. Based on the zero mean payoff, we entail the IPO underpricing. By the hypothesis of the market imperfection and the presence of risk, Shi(2000) analyze the imperfect information games between the investor and issuer. As far as I am concerned, my conclusion is that separating equilibrium exists and achieving a Pareto efficient both need full disclosure of information. Beatty and ritter (1986) assumes that the decision-making can be seen as call option.When it comes to conclusion, my opinion is that the underpricing will go up when the uncertainty increase. Benveniste(1989) assumes that there exists difficulty in information extraction. Analyzing the maximization of underwriter’s expected revenue shows that investment bank induces the invest to tell the truth by IPO underpricing. The relationship between the information production and IPO underpricing can be seen as the "black box" that imply by the information extraction theory. Dynamic information production in Chemmanur(1993) assumes that underpricing generates publicity and induces investors to learn more about that firm. Analyzed the price functional in the seondary market and market equilibrium shows that the larger the number of informed investor will be associated with a greater extent of underpricing. Two-sided information production in Yung(2005) analyzs the perfect Bayesian equilibria(PBE) and resolves the "participation restriction puzzle" of why bankers do not open sales to all bidders even when doing so would maximize competition and reduce underpricing.Many experts point out that Hao(2007) contributes directly to the progress on IPO laddering research.Laddering is a practice whereby the allocating underwriter requires the ladderer to buy additional shares of the issuer in the aftermarket as a condition for receiving shares at the offer price. We change the implicit assumption in the research of Hao(2007), such as IPO underpricing is a necessary condition for laddering. For my part,I agree with the fact that the aftermart price manipulation in IPO laddering can succeed, or may not a sustainable as an equilibrium phenomenon, or succeed in immediate aftermarket but cannot be feasible as an equilibrium phenomenon in the more longer period.Self-protection will be done by investment bank when there exists difficulty on information extraction. Manipulative strategy can be used by investor to decrease the offer price. That is to say, this manipulation that used by investor can also cause to IPO underpricing.