Chapter 7

IPO Underpricing*

Alexander    Leonard N. Stern School of Business, New York University, 44 West 4th Street, Suite 9-160, New York, NY 10012, USA1 Address for correspondence: Stern School of Business, New York University, Suite 9-160, 44 West Fourth Street, New York, NY 10012-1126. Phone 212-998-0304. Fax 212-995-4220.


When companies go public, the equity they sell in an initial public offering tends to be underpriced, resulting in a substantial price jump on the first day of trading. The underpricing discount in the United States averaged more than 20% during the 1990s, implying that firms left considerable amounts of money on the table. What explains this phenomenon?

This chapter reviews the principal ...

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