DP1873 Headline Underpricing and Entrepreneurial Wealth Losses in IPOs: Theory and Evidence

Author(s): Michel Antoine Habib, Alexander P. Ljungqvist
Publication Date: April 1998
Keyword(s): Agency Costs, Initial Public Offerings, Private Benefits of Control, Underpricing
JEL(s): G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1873

We develop the implications of the observation that entrepreneurs can affect, to some extent at least, the level of underpricing in their firms? Initial Public Offerings (IPOs) by, for example, choosing highly reputable investment bankers as underwriters. We argue that entrepreneurs can, and will, minimize underpricing, but that they will do so only to an extent that is commensurate with the minimization of their wealth losses. Our empirical results suggest this is indeed the case in the United States: entrepreneurs will minimize underpricing until their marginal wealth losses equal the marginal cost of reducing headline underpricing. This suggests that private benefits may not be of primary importance when going public.