IPO Underpricing: Explaining the First Day Price Jump

Open Access
Author:
Sosnader, Ryan Austin
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Coenraad Arnout P Pinkse, Thesis Supervisor
  • Russell Paul Chuderewicz, Honors Advisor
Keywords:
  • IPO
  • economics
  • finance
  • underwriter
  • technology
  • bank
Abstract:
Initial public offerings, or IPOs, are notorious for being underpriced. In this paper, we examine some potential causes of this phenomenon using United States IPO data from 2000 to 2014. We conclude using regression analysis and reasoning that the presence of a top investment bank as underwriter on an IPO tends to increase underpricing. We also show that membership in the technology sector is another factor that increases underpricing, more so than the underwriter. We discuss other factors such as incentives, information asymmetry, and the winner’s curse, that are also likely to cause underpricing but more difficult to analyze. The paper provides a comprehensive look at the causes of United States IPO underpricing in the last fifteen years.