ABSTRACT
The IPO is an important step when a firm is in the process of going public, and is often the largest equity issue that a company ever makes. Furthermore, it is also an important event in the transformation of the governance structure. As new outside capital is taken into the company, the new owners obtain both residual claimant rights as well as residual control rights. During this process, the underpricing of the IPO of common stock has been a well-documented ‘anomaly’, and there exists a substantial body of empirical work documenting the underpricing phenomenon in many countries. In the United States, for example, Ibbotson and Ritter (1995) found that the amount of short-run IPO underpricing was 15.3 per cent over the 1960-92 period. Are the issuers of the stock deliberately underpricing the new stock offer to outsiders? Is it rational for secondary market investors to buy stocks at higher prices than the primary market investors?
