The IPO and first seasoned equity sale: Issue proceeds, owner/managers' wealth, and the underpricing signal

Recent models of IPO underpricing suggest that high-quality firms underprice their IPOs to differentiate themselves from low-quality firms and, thus, receive a more favorable market response to subsequent equity offerings. We test this suggestion for 172 industrial firms that made an initial public...

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Bibliographic Details
Published in:Journal of banking & finance 1997-07, Vol.21 (7), p.967-988
Main Authors: Katherine Spiess, D., Pettway, Richard H.
Format: Article
Language:English
Subjects:
Banking
Corporate finance
Economic models
Equity
Going public
Impact analysis
Industrial enterprises
Initial Public Offering
Initial public offerings
IPOs
Ownership
Prices
Pricing
Pricing policies
Proceeds
Sales
Seasoned equity offerings
Stock offerings
Stock prices
Studies
Underpricing
Valuation
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Summary:Recent models of IPO underpricing suggest that high-quality firms underprice their IPOs to differentiate themselves from low-quality firms and, thus, receive a more favorable market response to subsequent equity offerings. We test this suggestion for 172 industrial firms that made an initial public offering during 1987–1991 and made a subsequent seasoned equity offering within three years of their IPO. We examine two measures of the impact of the hypothesized underpricing signal net of the cost of employing that signal. Inconsistent with the underpricing signal hypothesis, we find no evidence that firms recover the cost of an underpriced IPO in either higher issue proceeds or in greater wealth for the firm's initial owners.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(97)00014-9