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Signalling and the Pricing of New Issues
Author(s) -
GRINBLATT MARK,
HWANG CHUAN YANG
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb05063.x
Subject(s) - unobservable , issuer , signalling , comparative statics , econometrics , economics , intrinsic value (animal ethics) , cash , variance (accounting) , fraction (chemistry) , value (mathematics) , business , microeconomics , financial economics , finance , accounting , mathematics , statistics , philosophy , environmental ethics , chemistry , organic chemistry
This paper develops a signalling model with two signals, two attributes, and a continuum of signal levels and attribute types to explain new issue underpricing. Both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable “intrinsic” value of the firm and the variance of its cash flows. Many of the model's comparative statics results are novel, empirically testable, and consistent with the existing empirical evidence on new issues. In particular, the degree of underpricing, which can be inferred from observable variables, is positively related to the firm's post‐issue share price.