Underpricing, Overhang, and the Cost of Going Public to Preexisting Shareholders

:  IPO underpricing has been extensively studied; however, its impact on the wealth of preexisting shareholders has not been closely examined. We address the question of whether or not periods of high underpricing adversely affect preexisting shareholders. We find that high levels of underpricing ar...

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Bibliographic Details
Published in:Journal of business finance & accounting 2008-04, Vol.35 (3-4), p.434-458
Main Authors: Dolvin, Steven D., Jordan, Bradford D.
Format: Article
Language:English
Subjects:
Capital costs
Corporate finance
Going public
Initial public offering
Initial public offerings
IPO
Securities prices
share overhang
Shareholders wealth
Stock exchange
Stock prices
Stockholders
Studies
underpricing
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Summary::  IPO underpricing has been extensively studied; however, its impact on the wealth of preexisting shareholders has not been closely examined. We address the question of whether or not periods of high underpricing adversely affect preexisting shareholders. We find that high levels of underpricing are associated with increased share retention, which effectively offsets much of the potential cost. Overall, we find that the percentage of shareholder wealth lost is surprisingly stable over time, unlike underpricing itself. We also find that many factors known to be related to underpricing are not significant determinants of the cost of going public to preexisting owners.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.2008.02087.x