FinanceProfessor.com

Nice review article! If you are doing work on IPOs start here! It has an amazing 126 references.

Executive Summary:

This is a nice review article.   Definitely not groundbreaking, but does offer some interesting synthesis of the work that has been done.   The authors make three main points: 

1) “IPO phenomena are not stationary.”
2) Near-term research into underpricing will probably focus on share allocation.
3) Longer term research gain will come from non- rational and agency 
    explanations.

Existing financial literature has focused on three strands:

1) Variations in issuing activity (i.e.   Hot and cold periods when IPO volume can vary tremendously.)    Some of the papers in this area can be further broken down into those that look at the stage of life for the issuing firms (ex.   Zingales, (Review of Economic Studies1995,)   market timing, where the firm tries to time the IPO to get the best possible price.   (Papers within this area include: Lucas and McDonald (JF 1990,)   which was left off the references in a rare JF error, Schultz (JFE 2001,)   Choe, Masulis, and Nanda (JEF1993,)   and, empirically, Lowry and Schwert (JF, 2002.)

2) Pricing is the most traditional of the “underpricing” research.   The work done in this area has centered on:
 

a) Asymmetric information.   For example, a firm can signal to its quality by leaving money on the table or by generating demand for secondary offerings through underpricing.  (Ex. Welch, (JF 1989) and Chemmanur, (JF 1993.)  

b) Other things, such as a reluctance to get sued (Hughes and Thakor, RFS (1992,)   rationing of winners (Rock, JFE (1986),  and investment bankers taking advantage of uninformed firms, although Muscarella and Vetsuypens (JFE 1989,)   largely disprove this.    

c) The area the authors believe to be most likely to explain the underpricing is the allocation of shares (Jim’s note: This was before the news in the fall of 2002 that had investment bankers giving allocations to gain more investment banking business and therefore is even more prophetic than it seems)

3)  The fine strands of research in IPOs have focused on long term underperformance.   This area is tricky due to the problem of measurement (see Fama or behavioral Finance, which is not listed either.)    If we accept this underperformance to be true, it appears most likely to be caused by over confidence (see Ljungqvist, Nanda, and Singh, (SSRN 2002.)  

· Gompers and Lerner (2001 working paper) find that there “were fewer US IPOs from 1935 to 1959 (24 years) than in 1969 alone.

· The 683 IPOs of 1969 is more than in any year even during the 1990s.

· The number of IPOs fell nearly 77% from 2000 to 2001 where only 80 (the least IPOs since 1982) were completed.