Underpricing of initial public offerings in experimental asset markets
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Underpricing of initial public offerings in experimental asset markets Sascha Füllbrunn1 · Tibor Neugebauer2 · Andreas Nicklisch3 Received: 27 October 2018 / Revised: 1 December 2019 / Accepted: 5 December 2019 © The Author(s) 2019
Abstract The underpricing of initial public offerings (IPO) is a well-documented fact of empirical equity market research. Theories explain this underpricing with market imperfections. We study three empirically relevant IPO mechanisms under almost perfect market conditions in the laboratory: a stylized book building approach, a closed book auction, and an open book auction. We report underpricing in each of these IPO mechanisms. Uncertainty about the aftermarket behavior may partly explain IPO excess returns but underpricing persists even in the repeated setting where uncertainty is negligible and despite the equilibrium adjustment dynamics, that we observe in the data. The data reveal a market-wide impact of investors’ reluctance to sell in the aftermarket at a price below the offering price. We conclude that a behavioural bias similar to the disposition effect fosters IPO underpricing in our setting. Keywords Initial public offerings · Underpricing · Common value auctions · Experimental finance · Disposition effect · Learning JEL Classification C9 · D02 · D40 · D83 · G02 · G32
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1068 3-019-09638-7) contains supplementary material, which is available to authorized users. * Tibor Neugebauer [email protected] Sascha Füllbrunn [email protected] Andreas Nicklisch [email protected] 1
Institute for Management Research, Radboud University, Nijmegen, The Netherlands
2
Luxembourg School of Finance, University of Luxembourg, Luxembourg City, Luxembourg
3
University of Applied Sciences of the Grisons, Chur, Switzerland
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1 Introduction The underpricing of initial public offerings (IPO) is a well-documented fact of empirical equity market research. Ritter (2003) reports results from stock exchanges in 38 countries, all of which show evidence of first-day abnormal returns. The size of IPO underpricing is cyclical; for example, at the height of the dot-com bubble the average IPO was underpriced by more than 50%, whereas the long-term average of IPO underpricing is 10–20% in the U.S. (see Ljungqvist 2007, Fig. 1). The underpricing phenomenon is persistent, even across different IPO mechanisms. We report a laboratory study on underpricing of IPO. Our data indicate that investors’ reluctance to sell their shares at a loss is a driver of IPO underpricing. Shefrin and Statman (1985) coined the term disposition effect to describe the stylized fact that investors hold on to their losing investments for too long and sell their winning investments too early. The disposition effect affects underpricing because IPO investors generally offer their shares for sale in the aftermarket only above but not below the IPO price, while shading their
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