Ownership dispersion, costly information, and IPO underpricing

James R. Booth, Lena Chua

    Research output: Contribution to journalArticlepeer-review

    244 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

    Fingerprint

    Dive into the research topics of 'Ownership dispersion, costly information, and IPO underpricing'. Together they form a unique fingerprint.

    Cite this