Ownership dispersion, costly information, and IPO underpricing

James R. Booth, Lena Booth

    Research output: Contribution to journalArticle

    213 Citations (Scopus)

    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

    Fingerprint

    Ownership
    IPO underpricing
    Costly information
    Information costs
    Investors
    Underpricing
    Incentives
    Market liquidity
    Empirical results
    Liquidity
    Secondary market

    Keywords

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

    ASJC Scopus subject areas

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

    Cite this

    Ownership dispersion, costly information, and IPO underpricing. / Booth, James R.; Booth, Lena.

    In: Journal of Financial Economics, Vol. 41, No. 2, 06.1996, p. 291-310.

    Research output: Contribution to journalArticle

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