Underpricing, Tie-Ins, and the IPO Bubble: Some Empirical Evidence

Abstract

We analyze underpricing in the United States surrounding the time of the collapse of the IPO market in the last quarter of 2000. During this quarter, the press gave insider accounts about how profits (from extreme underpricing) were made through illegal tie-ins in the IPO aftermarket. These allegations motivate our research as we seek to find out what impact they had on underpricing. Our research hypothesis is that the allegations will lead to overpricing. in our analysis, we use a different methodology. First, we offer different underpricing measures than used previously. Second, we compare IPO underpricing with a standard given by the SEO market. Third, we focus on dollar underpricing as opposed to percentage underpricing. This focus is consistent with our aim to examine the amount of profit-taking in the IPO aftermarket. Prior to the allegations, we find underwriters and preferred clients could have made over half the money raised by the firm. However, this profit-taking made in the IPO aftermarket dissipates at the time of the allegation and shortly after. Consistent with our research hypothesis, we find significant positive overpricing during this period (which lasts about six months). However, after this period, underpricing reverts to historical norms. In addition to offering support for our research hypothesis, we show how setting the offer price relative to an ex ante price (i.e., average price range) impacts underpricing. Finally, we find that the inclusion of high-tech or Internet IPOs has little influence on our findings.