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IPO pricing as a function of your investment banks' past mistakes: The case of Facebook

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  • Krigman, Laurie
  • Jeffus, Wendy

Abstract

On May 18, 2012 Facebook held its initial public offering (IPO), raising over $16 billion making it one of the largest IPOs in history. To the surprise of many investors, there was no underpricing―the stock closed the first day of trading flat from its offer price. The Facebook IPO was described as not only disappointing but also detrimental to the broader market. We explore why one IPO should have such widespread consequences. We document that the IPO market was silent for 41days following Facebook. When it re-opened 41days later, the average level of underpricing increased from 11% pre-Facebook to 20% post-Facebook. The common blame was an overall increase in risk-aversion among investors. We offer an alternative explanation. We show that the entire increase in underpricing is concentrated in the IPOs of the Facebook lead underwriters. We find no statistical difference in underpricing pre- and post-Facebook for non-Facebook underwriters. We argue that investment bank loyalty to their institutional investor client based propelled the Facebook underwriters to increase underpricing to compensate for the perceived losses on Facebook.

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  • Krigman, Laurie & Jeffus, Wendy, 2016. "IPO pricing as a function of your investment banks' past mistakes: The case of Facebook," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 335-344.
    • Handle: RePEc:eee:corfin:v:38:y:2016:i:c:p:335-344
    DOI: 10.1016/j.jcorpfin.2016.02.003
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    References listed on IDEAS

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    1. Ljungqvist, Alexander P. & Wilhelm, William Jr., 2002. "IPO allocations: discriminatory or discretionary?," Journal of Financial Economics, Elsevier, vol. 65(2), pages 167-201, August.
    2. Bartling, Björn & Park, Andreas, 2010. "How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(2), pages 441-471, April.
    3. Céline Gondat‐Larralde & Kevin R. James, 2008. "IPO Pricing and Share Allocation: The Importance of Being Ignorant," Journal of Finance, American Finance Association, vol. 63(1), pages 449-478, February.
    4. Tim Loughran & Jay R. Ritter, 2002. "Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?," The Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 413-444, March.
    5. Thomas J. Chemmanur & Gang Hu & Jiekun Huang, 2010. "The Role of Institutional Investors in Initial Public Offerings," The Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4496-4540, December.
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    Cited by:

    1. Chandler, Jeffrey A. & Payne, G. Tyge & Moore, Curt & Brigham, Keith H., 2019. "Family involvement signals in initial public offerings," Journal of Family Business Strategy, Elsevier, vol. 10(1), pages 8-16.
    2. James, Kevin R. & Valenzuela, Marcela, 2020. "The efficient IPO market hypothesis: theory and evidence," LSE Research Online Documents on Economics 104020, London School of Economics and Political Science, LSE Library.
    3. Richard Herron, 2022. "How Much Does Your Banker’s Target-Specific Experience Matter? Evidence from Target IPO Underwriters that Advise Acquirers," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(2), pages 217-258, April.
    4. James, Kevin R. & Valenzuela, Marcela, 2019. "The efficient IPO market hypothesis: theory and evidence," LSE Research Online Documents on Economics 118934, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    IPOs; Underpricing; Money on the table;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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