Working Paper: CEPR ID: DP3314
Authors: Alexander P. Ljungqvist; William J. Wilhelm Jr.
Abstract: IPO initial returns reached astronomical levels during 1999-2000. We show that the regime shift in initial returns and other elements of pricing behaviour can be at least partially accounted for by a variety of marked changes in pre-IPO ownership structure and insider selling behaviour over the period which reduced key decision-makers? incentives to control underpricing. After controlling for these changes, there appears to be little special about the 1999-2000 period, aside from the preponderance of Internet and high-tech firms going public. Our results suggest that it was firm characteristics that were unique during the ?dot-com bubble? and that pricing behaviour followed from incentives created by these characteristics.
Keywords: hot issue markets; initial public offerings; intermediation; internet; underpricing
JEL Codes: G24; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fragmented ownership (G32) | weakened incentives to mitigate underpricing (D49) |
| drop in frequency and magnitude of insider secondary sales (G14) | undermined bargaining power (D43) |
| characteristics of internet firms (L86) | significant underpricing (G19) |
| pre-IPO insider ownership decline (G34) | increased underpricing (G19) |
| decrease in insider ownership stakes (G34) | diminished incentives for higher offer prices (D43) |
| insider ownership concentration (G34) | underpricing (D49) |