Clustering of Initial Public Offerings, Information Revelation and Underpricing
By providing an analysis of sequential going-public decisions the paper outlines conditions under which the likelihood of a second initial public offering increases after a first firm has gone public. Two effects can trigger the rise of hot issue markets in a setting with asymmetric and costly information about both firm quality and industry prospects. The risk-averse entrepreneur can be subject to risk-induced selling pressure because of uncertain industry prospects conveyed by a first IPO in the industry. Also, investors can free-ride on the industry news, and increase their valuation for a second firm by abstaining from further costly information production. Finally, the model offers and explanation for the empirical finding that hot issue markets exhibit a higher degree of underpricing than cold issue markets.
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