Ownership dispersion, costly information, and IPO underpricing

James R. Booth, Lena Chua

Research output: Contribution to journalArticle

225 Scopus citations

Abstract

We develop an explanation for IPO underpricing in which the issuer's demand for ownership dispersion creates an incentive to underprice. Promoting oversubscription allows broad initial ownership, which in turn increases secondary-market liquidity. Increased liquidity reduces the required return to investors. Broad initial ownership, however, requires an increase in investor-borne information costs. These information costs are offset through initial underpricing. Empirical results are consistent with initial underpricing reflecting the level of ownership dispersion.

Original languageEnglish (US)
Pages (from-to)291-310
Number of pages20
JournalJournal of Financial Economics
Volume41
Issue number2
DOIs
StatePublished - Jun 1996

Keywords

  • Information cost
  • Initial public offerings
  • Ownership dispersion
  • Underpricing

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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