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Uncertain Demand, Heterogeneous Expectations, and Unintentional IPO Underpricing

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  • Bruce K. Gouldey

Abstract

Distinguishing between intentional and unintentional incentives to underprice initial public offerings (IPOs), I develop sufficient conditions for the winners' curse postulated by Miller (1977) and implications for intertemporal changes in the magnitude of underpricing. Specifically, I show that unintentional underpricing (and occasional overpricing) of IPOs is a consequence of investors' heterogeneous expectations of the uncertain value of a stock when the supply is constrained and the underwriter's price discovery process only partially identifies aggregate demand. Moreover, an IPO that is oversubscribed in the premarket sale almost certainly will experience a short‐term price increase in the secondary market.

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  • Bruce K. Gouldey, 2006. "Uncertain Demand, Heterogeneous Expectations, and Unintentional IPO Underpricing," The Financial Review, Eastern Finance Association, vol. 41(1), pages 33-54, February.
    • Handle: RePEc:bla:finrev:v:41:y:2006:i:1:p:33-54
    DOI: 10.1111/j.1540-6288.2006.00132.x
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    Cited by:

    1. Andrikopoulos, Andreas, 2015. "Truth and financial economics: A review and assessment," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 186-195.
    2. Ramit Anand & Balwinder Singh, 2019. "Do Firm- and Board-specific Characteristics Corroborate Underpricing? A Study on the Indian IPOs," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 44(1), pages 86-102, February.
    3. Dong, Xiuliang & Wang, Yiqun & Zhang, Jiaming & Liu, Jianing, 2024. "Sponsor Co-investment, inquiry divergence, and IPO pricing efficiency," Finance Research Letters, Elsevier, vol. 62(PA).

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