How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing
When a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment...
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| Veröffentlicht in: | Journal of financial and quantitative analysis 2010-04, Vol.45 (2), p.441-471 |
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| container_title | Journal of financial and quantitative analysis |
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| creator | Bartling, Björn Park, Andreas |
| description | When a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment option. This option is a standard feature of initial public offering (IPO) arrangements that allows the underwriter to purchase more shares from the issuer at the original offer price. We propose a theoretical model to study the implications of this combination of short position and overallotment option on the pricing of the IPO. Maximizing the sum of both the profits from their share of the offer revenue and the potential profits from aftermarket trading, we show that underwriters strategically distort the offer price. This results either in exacerbated underpricing when favorably informed underwriters lower prices to secure a signaling benefit, or in informationally inefficient offer prices when underwriters pool in offer prices irrespective of their information. |
| doi_str_mv | 10.1017/S0022109010000128 |
| format | Article |
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Financ. Quant. Anal</addtitle><description>When a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment option. This option is a standard feature of initial public offering (IPO) arrangements that allows the underwriter to purchase more shares from the issuer at the original offer price. We propose a theoretical model to study the implications of this combination of short position and overallotment option on the pricing of the IPO. Maximizing the sum of both the profits from their share of the offer revenue and the potential profits from aftermarket trading, we show that underwriters strategically distort the offer price. This results either in exacerbated underpricing when favorably informed underwriters lower prices to secure a signaling benefit, or in informationally inefficient offer prices when underwriters pool in offer prices irrespective of their information.</description><subject>Bank earnings</subject><subject>Banks</subject><subject>Financial securities</subject><subject>Initial public offerings</subject><subject>Investment banking</subject><subject>Investors</subject><subject>Market prices</subject><subject>Prices</subject><subject>Profits</subject><subject>Quantitative analysis</subject><subject>Return on investment</subject><subject>Sales</subject><subject>Security prices</subject><subject>Short sales</subject><subject>Underwriting</subject><issn>0022-1090</issn><issn>1756-6916</issn><fulltext>true</fulltext><rsrctype>article</rsrctype><creationdate>2010</creationdate><recordtype>article</recordtype><sourceid>ABUWG</sourceid><sourceid>AFKRA</sourceid><sourceid>BENPR</sourceid><sourceid>CCPQU</sourceid><sourceid>DWQXO</sourceid><recordid>eNp1kM1KAzEURoMoWKsP4EIIuB69SWYmmaWI1kKhaq24EEKaH53aTjSJaN_elIouxGwu4Xzf5XAROiRwQoDw0wkApQQaIJAfoWIL9Qiv6qJuSL2NemtcrPku2otxvg5RCj30eOU_8GTVmVarZPHk2YeEJ2phIz5zzuqE07PFw875sFSp9Z1a4AvnWt3aTq-wd3h4PcbXodW5oTqDp52x4TX_2-5pH-04tYj24Hv20fTy4u78qhiNB8Pzs1GhK0ZS4YQxBsys5DNqqAGureOWkapWwBqnmNIzUZaNFaoSRplK1wKIrcAp4wAM66Pjzd7X4N_ebUxy7t9DVo2ScsEJZTUtc4psUjr4GIN1MmsuVVhJAnJ9RPnniLlztOnMY_Lhp5C3Aikbknmx4W1M9vOHq_Aia854JevBjRyIe_HA6K0c5Dz7dlDLWWjNk_1V_d_iC0Pri_k</recordid><startdate>20100401</startdate><enddate>20100401</enddate><creator>Bartling, Björn</creator><creator>Park, Andreas</creator><general>Cambridge University Press</general><scope>BSCLL</scope><scope>AAYXX</scope><scope>CITATION</scope><scope>3V.</scope><scope>7WY</scope><scope>7WZ</scope><scope>7X1</scope><scope>7XB</scope><scope>87Z</scope><scope>8A9</scope><scope>8BJ</scope><scope>8FK</scope><scope>8FL</scope><scope>ABUWG</scope><scope>AFKRA</scope><scope>ANIOZ</scope><scope>BENPR</scope><scope>BEZIV</scope><scope>CCPQU</scope><scope>DWQXO</scope><scope>FQK</scope><scope>FRAZJ</scope><scope>FRNLG</scope><scope>F~G</scope><scope>JBE</scope><scope>K60</scope><scope>K6~</scope><scope>L.-</scope><scope>M0C</scope><scope>PQBIZ</scope><scope>PQBZA</scope><scope>PQEST</scope><scope>PQQKQ</scope><scope>PQUKI</scope><scope>Q9U</scope><scope>S0X</scope></search><sort><creationdate>20100401</creationdate><title>How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing</title><author>Bartling, Björn ; 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| identifier | ISSN: 0022-1090 |
| ispartof | Journal of financial and quantitative analysis, 2010-04, Vol.45 (2), p.441-471 |
| issn | 0022-1090 1756-6916 |
| language | eng |
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| source | Business Source Complete; Cambridge Journals; Jstor Complete Legacy |
| subjects | Bank earnings Banks Financial securities Initial public offerings Investment banking Investors Market prices Prices Profits Quantitative analysis Return on investment Sales Security prices Short sales Underwriting |
| title | How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing |
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