Innovation, Appropriability, and the Underpricing of Initial Public Offerings

Using the information asymmetries theory of underpricing, we investigate the role of innovation in the underpricing of initial public offerings (IPOs). We develop and test a model in which patents reduce information asymmetries in industries where the link between patents and inventive returns is transparent, thereby reducing underpricing. Conversely, patents reflect increased information asymmetries and underpricing in industries where the link is not transparent. We examine these relationships in a sample of 1,413 IPOs and find strong support for our hypotheses. In so doing, we make an important theoretical contribution by showing that the IPO market contextualizes firm information.