Title
An Asymmetric Payoff-Based Explanation of IPO "Underpricing"
Document Type
Article
Abstract
The widely studied phenomenon of underpricing of new issues of common stock can be explained by underwriters’ payoff asymmetry. Under uncertain investors’ demand for a new issue, the underwriter’s downside risk if he overestimates demand can be significantly larger than the upside potential when he underestimates demand. To protect himself from the large downside risk of overestimating demand, the underwriter rationally chooses a lower offer price than he would have in the absence of demand uncertainty.
Date of Authorship for this Version
May 2007
Recommended Citation
Saha, Atanu and Ferrell, Allen, "An Asymmetric Payoff-Based Explanation of IPO "Underpricing"" (2007). Harvard Law School John M. Olin Center for Law, Economics and Business Discussion Paper Series. Paper 587.
http://lsr.nellco.org/harvard_olin/587
