Are IPOs "Overpriced?" Strategic Interactions between the Entrepreneur and the Underwriter
Two major problems are well-known in IPO research as "IPO puzzles." First, a first listing price is much higher than the offering price set by the underwriter, which is called "underpricing." Second, in the long-run the share price becomes much lower than the offering price, which is called "long-run underperformance." A vast body of research explains why these IPO puzzles coexist. Assuming that investors' opinions diverge, we conclude that even the offering price is distorted through strategic interaction between the entrepreneur and the underwriter. Specifically, the offering price is already "overpriced." Hence, the share price will drop substantially as information asymmetry between both the entrepreneur and the underwriter and investors is mitigated after the IPO, which delivers long-run underperformance. Our experiment supports these conclusions. Keywords: IPO puzzles; Earnings management; Experiment.
IPO puzzles, Earnings management, Experiment
Research Institute for Economics and Business Administration,
Rokkodai-cho, Nada-ku, Kobe
Graduate School of Commerce, Doshisha University
Graduate School of Economics, Osaka University