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.

There is a general perception that the large trading volume in initial public offerings is mostly due to “flippers ” that are allocated shares in the offering and immediately resell them. On average, however, flipping accounts for only 19 % of trading volume and 15 % of shares offered during the first two days of trading. Institutions do more flipping than retail customers and hot IPOs are flipped much more than cold IPOs. Institutions do not quickly flip cold IPOs to take advantage of price support activities by the underwriter. Explicit penalty bids are rarely assessed against flippers.

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

We find that dual-class firms experience less underpricing than single-class firms, and we explore several hypotheses which might explain this phenomenon. Compared to single-class firms, dual-class companies have slightly higher post-IPO institutional ownership and experience fewer control events. Although dual-class firms achieve a lower underpricing cost, they trade at lower prices relative to earnings and sales than do single-class IPOs. This pricing differential, combined with evidence that dual-class managers earn higher compensation and that dual-class shares are common among media and entertainment industry IPOs, suggests that dual-class ownership structures protect private control benefits.

Conflicts of interest and efficient contracting in IPOs We study the role of underwriter compensation in mitigating conflicts of interest between companies going public and their investment bankers. Making the bank’s compensation more sensitive to the issuer’s valuation should reduce agency conflicts and thus underpricing. Consistent with this prediction, we show that contracting on higher commissions in U.K. IPOs leads to significantly lower underpricing: a one percentage point increase in the commission rate reduces the initial return by 11 percentage points, after controlling for other influences on underpricing. Moreover, we present evidence consistent with issuers choosing commission rates optimally. Overall, our results indicate that issuers and banks contract efficiently in U.K. IPOs.

A simple model is developed in the paper in which two market conditions change over time: (i) investor sentiment or price-insensitive demand; and (ii) feedback trader risk or the propensity of investors to chase trends. The model shows that these conditions partially explain the three anomalies associated with the IPO market: (i) underpricing; (ii) windows of opportunity for new issues and (iii) long-term underperformance. The model is tested using a sample of firm commitment IPOs over the 1975-1987 period. The paper finds that the predictions of the model are largely borne out in the data. 1 We thank Jay Ritter and Mike Vetsuypens, and I.B.E.S. for allowing us to use their database.

We develop a model in which two profit maximizing exchanges compete for IPO listings. They choose the listing fees paid by entrepreneurs wishing to go public and control the trading costs incurred by investors. All entrepreneurs prefer lower costs, however entrepreneurs di#er in how they value a decrease in trading costs. Hence, in equilibrium, competing exchanges obtain positive expected profits by o#ering di#erent execution costs and di#erent listing fees. As a result, firms that list on di#erent exchanges have di#erent characteristics. The model has testable implications for the cross--sectional characteristics of IPOs on di#erent quality exchanges and the relationship between the level of trading costs and listing fees. We also find that competition does not guarantee that exchanges choose welfare maximizing trading rules. Keywords: Exchanges, Trading Costs, Listings, Competition. # Dept of Finance, HEC, School of Management and CEPR, 1 rue de la Liberation, 78351 Jouy ...

Key words: corporate governance, voting rights, shareholder coalitions, corporate performance.

Some of the most important choices faced by a firm considering going public concern the structure of the firm’s governance and monitoring mechanisms. These decisions influence the initial valuation of the firm, its long-term operating performance, and the investment decisions of institutional investors. We examine varying governance mechanisms in place at the time of a firm's initial public offering. Our sample consists of over 200 Real Estate Investment Trusts (REITs) over the time period 1991 to 1998. We use REITs in our study for several reasons: (1) The relatively transparent nature of REITs (compared to industrial firms) mitigates information asymmetry about the types of projects the firms undertake. (2) By focusing on one industry, we reduce the effects of varying asset risk and predictability. (3) REITs exhibit substantial heterogeneity in governance structures, and in pre-IPO history (for example, our sample includes REIT IPOs of new organizations, former limited partnerships, former private firms or private REITs). (4) The legal restrictions that all REITs must adhere to lessen the degree of managerial control relative to the standard corporation. Our analysis indicates that REIT governance structure at the time of the IPO, and their pre-IPO history are important determinants of their initial value

31 st March 2008Abstract: A central measure of the efficiency of the Initial Public Offering (IPO) market is the extent to which issues are underpriced. Legal, regulatory, disclosure and underwriting pressures have moulded the IPO market since World War II. This paper presents new and comprehensive evidence covering British IPOs since World War I. We find that during the period from 1917 to 1945, public offers were underpriced by an average of only 3.80%, as compared to 9.15 % in the period from 1946 to 1986 (when the UK stock market was deregulated). This substantial rise is robust to the inclusion of variables controlling for changes in firm risk and method of issue, and improvements in disclosure and the emergence of prestige underwriters.