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Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings
Author(s) -
WELCH IVO
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.tb05064.x
Subject(s) - initial public offering , imitation , business , quality (philosophy) , equity (law) , order (exchange) , monetary economics , industrial organization , finance , economics , psychology , social psychology , philosophy , epistemology , political science , law
This paper presents a signalling model in which high‐quality firms underprice at the initial public offering (IPO) in order to obtain a higher price at a seasoned offering. The main assumptions are that low‐quality firms must invest in imitation expenses to appear to be high‐quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high‐quality firms at the IPO can then add sufficient signalling costs to these imitation expenses to induce low‐quality firms to reveal their quality voluntarily. The model is consistent with several documented empirical regularities and offers new testable implications. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital in the years after their IPO.