Underpricing, explained by ex-ante uncertainty

Abstract

This paper examines the influence of ex-ante uncertainty about the intrinsic value of the stock on the underpricing of the IPO’s of US companies. The model of K. Rock extended by R. Beatty and J. Ritter (1986) and the model of D. Baron (1982) argue that ex-ante uncertainty about the intrinsic value of the stock causes underpricing of an IPO. These models are tested by developing different proxies of ex-ante uncertainty among the intrinsic value of the stock, i.e. the market capitalization of the company, the reputation of the underwriter, the age of the company, the R&D expenditures of the company and the issue size of the IPO. The research consists of 435 US IPO’s from January 2014 until April 2016. The results suggest that all the proxies do have a significant effect on the level of underpricing although they do not all have the expected effect. Therefore, it is possible to conclude that the model of K. Rock (1986) extended by R. Beatty and J. Ritter (1986) and the model of D. Baron (1982) do not hold for this time period in the United States.