The underpricing of initial public offerings: A theoretical and empirical reconsideration of the adverse selection hypothesis

1993 ◽  
Vol 3 (2) ◽  
pp. 221-239 ◽  
Author(s):  
Ronald J. Balvers ◽  
John Affleck-Graves ◽  
Robert E. Miller ◽  
Kevin Scanlon
Keyword(s):  
Adverse Selection ◽  
Initial Public Offerings ◽  
Selection Hypothesis ◽  
Public Offerings

Lockups Revisited

2005 ◽  
Vol 40 (3) ◽  
pp. 519-530 ◽  
Author(s):  
James C. Brau ◽  
Val E. Lambson ◽  
Grant McQueen
Keyword(s):  
Moral Hazard ◽  
Adverse Selection ◽  
Initial Public Offerings ◽  
Empirical Support ◽  
Seasoned Equity Offerings ◽  
Comparative Statics ◽  
Equity Offerings ◽  
Public Offerings ◽  
Theoretical Predictions ◽  
Adverse Selection Problem

AbstractLockups are agreements made by insiders of stock-issuing firms to abstain from selling shares for a specified period of time after the issue. Brav and Gompers (2003) suggest that lockups are a bonding solution to a moral hazard problem and not a signaling solution to an adverse selection problem. We challenge this conclusion theoretically and empirically. In our model, insiders of good firms signal by putting and keeping (locking up) their money where their mouths are. Our model yields two comparative statics: lockups should be shorter when a firm is i) more transparent and/or ii) more risky. Using a sample of 4,013 initial public offerings and 3,279 seasoned equity offerings between 1988 and 1999, we find empirical support for our theoretical predictions.

scholarly journals Initial Public Offerings in Hot and Cold Markets

2004 ◽  
Vol 39 (3) ◽  
pp. 541-569 ◽  
Author(s):  
Jean Helwege ◽  
Nellie Liang
Keyword(s):  
Stock Returns ◽  
Adverse Selection ◽  
Initial Public Offerings ◽  
Poor Quality ◽  
Growth Potential ◽  
Technological Innovations ◽  
Managerial Opportunism ◽  
Public Offerings ◽  
Adverse Selection Costs ◽  
New Industry

AbstractThe literature offers many explanations for why the IPO market cycles from hot to cold. These include theories in which hot markets represent clusters of IPOs in a new industry, and signaling models that predict that hot markets draw in better quality firms. Others suggest hot market IPOs' stock returns reflect their poor quality. We compare IPOs over cycles during 1975–2000 and find that hot and cold IPO markets do not differ so much in the characteristics of the firms that go public as in the quantity of firms that go public. Both hot and cold IPOs are largely concentrated in the same narrow set of industries and they have few distinctions in profits, age, or growth potential. Our results suggest that hot markets are not driven primarily by changes in adverse selection costs, managerial opportunism, or technological innovations, but more likely reflect greater investor optimism.

scholarly journals Making Waves: To Innovate or Be a Fast Second?

2016 ◽  
Vol 51 (2) ◽  
pp. 415-433 ◽  
Author(s):  
Chris Yung
Keyword(s):  
Venture Capital ◽  
Adverse Selection ◽  
Initial Public Offerings ◽  
Irreversible Investment ◽  
Public Offerings ◽  
Free Ride ◽  
Leaders And Followers

AbstractInternal finance leads to a stalemate in innovation games; each firm wants to free-ride on the others’ costly experimentation. When instead innovation is financed externally (e.g., with venture capital or initial public offerings), there is an endogenous cost to delay. Waiting to make risky irreversible investment conveys pessimistic information. I characterize the relative sizes of waves of leaders and followers in innovation cycles, and the endogenous, intertemporal distribution of quality as each wave builds and crashes. Finally, old waves leave an adverse selection “hangover,” such that too much early innovation can cause the market for future innovation to break down.

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