We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena.

Using a sample of both U.S. and international IPOs we find evidence of the following: IPO allocation policies favor institutional investors both in the U.S. and worldwide. Constraints on the discretion bankers exercise in the allocation of IPO shares reduce institutional allocations. Constraints on allocation discretion result in offer prices that deviate less from the indicative price range established prior to bankers ’ efforts to gauge demand among institutional investors. We interpret this as indicative of diminished information production. Initial returns, which reflect a significant indirect cost of going public, are directly related to this measure of information production and inversely related to the fraction of shares allocated to institutional investors.

We examine the costs and benefits of the global integration of initial public offering (IPO) markets associated with the diffusion of U.S. underwriting methods in the 1990s. Bookbuilding is becoming increasingly popular outside the United States and typically costs twice as much as a fixed-price offer. However, on its own, bookbuilding only leads to lower underpricing when conducted by U.S. banks and/or targeted at U.S. investors. For most issuers, the gains associated with lower underpricing outweighed the additional costs associated with hiring U.S. banks or marketing in the United States. This suggests a quality/price trade-off contrasting with the findings of Chen and Ritter, particularly since non-U.S. issuers raising US$20 million–US$80 million also typically pay a 7% spread when U.S. banks and investors are involved. Traditionally firms going public engaged domestic banks to market their initial public offerings (IPOs) to domestic investors. Both tradition and regulatory guidelines caused share pricing and allocation practices to vary substantially from country to country. In most countries, banks used fixed-price methods whereby shares were priced and then put up for subscription. This

IPO initial returns reached astronomical levels during 1999-2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by a variety of marked changes in pre-IPO ownership structure and insider selling behavior over the period, which reduced key decision-makers ’ incentives to control underpricing. After controlling for these changes, the difference in underpricing between 1999-2000 and the preceding three years is much reduced. Our results suggest that it was firm characteristics that were unique during the “dot-com bubble ” and that pricing behavior followed from incentives created by these characteristics.

This paper examines the book building mechanism for marketing initial public offerings. We present a model where the underwriter selects a group of investors along with a pricing and allocation mechanism in a way that maximizes the information generated during the process of going public at a minimum cost. Unlike previous models, we take into account the moral hazard problem that is faced by investors when evaluation is costly. Our results suggest that for firms with the most to gain from accurate pricing, the number of investors participating in the offering is larger, and underpricing will be greater. When a firm's demand for accuracy is relatively low, the expected amount of underpricing exactly offsets the investors' costs of acquiring information. However, when the demand for accuracy is high, the expected amount of underpricing can exceed the cost of information and investors can earn economic rents

We provide evidence that firms attempting IPOs condition offer terms and the decision whether to carry through with an offering on the experience of their primary market contemporaries. Moreover, while initial returns and IPO volume are positively correlated in the aggregate, the correlation is negative among contemporaneous offerings subject to a common valuation factor. Our findings are consistent with investment banks implicitly bundling offerings subject to a common valuation factor to achieve more equitable internalization of information production costs and thereby preventing coordination failures in primary equity markets.

meetings in San Antonio, TX for helpful comments and suggestions. We remain responsible for any errors. Wanna Dance? How Firms and Underwriters Choose Each Other How do equity issuing firms and underwriters get together? We develop a theoretical model founded on the idea that issuers and underwriters associate by mutual choice. Underwriters look to the quality of the issuers who may wish to employ their services and issuers look to the abilities of the underwriters they consider employing. Our approach contrasts to the conventional view of one-sided choice established in the existing literature. Our model suggests that issuers and underwriters will associate with different partners for subsequent offerings if changes in issuer quality and/or underwriter reputation are large enough. Our empirical finding that issuers who experience a relative reduction in quality from IPO to SEO switch to lower reputation underwriters for SEO offerings provides especially convincing support for this

This paper explores the role of investment bankers and lock-up provisions in the market for new equity issues. In a sample of 1,948 IPOs, we find support for the notion that lock-ups serve as commitment mechanisms at the time of the IPO. Insiders of firms that are associated with greater informational asymmetries lockup their shares for a longer period of time. We also find that underpricing is higher for firms that lock-up their shares for a longer period of time or lock-up a larger fraction of their shares. The average abnormal return at lock-up expiration is-1.2 % on average and is larger for firms that lock-up a greater fraction of their shares and firms that are backed by venture capitalists. This price drop is inconsistent with rational expectations on the part of investors. Finally, we find that earnings forecasts made by both affiliated and unaffiliated analysts are more optimistic around lock-up expiration and their recommendations are temporarily more favorable. Moreover, affiliated analysts are more likely to issue “strong buy ” recommendations than are unaffiliated analysts at these lock-up expirations.

Our model of the initial public offering process links the three main empirical IPO ‘anomalies’ – underpricing, hot issue markets, and long-run underperformance – and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000 market for Internet IPOs) to the presence of a class of investors who are ‘irrational’ in the sense of having exuberant expectations regarding future performance. Underpricing and long-run underperformance emerge as underwriters attempt to maximize profits from the sale of equity, at the expense of these exuberant investors. Underpricing serves to compensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.

We analyze how legal rules affect a firm’s decisions to go public, design of securities and initial ownership structure. By extensively using dual-class shares, Swedish IPOs are primarily privately controlled firms that owners take public to maintain control, to raise new capital and to expand by stock financed acquisitions. 50 % return for a seasoned equity offering. Five years after the IPO, the original owner still controls 2/3 (44%) of the votes (capital). Since control rents associated with a control block are particularly valuable in legal regimes that provide weak minority protection and allow for separation of votes from capital, control positions are never sold piecemeal. This explains the high ownership concentration in countries with such legal regimes. Keywords: JEL classification: G32