Continuing with the “history and finance” theme that seems to have arisen of late, Chambers and Dimson examine IPOs from the
In their words:
“In examining how underpricing changed over time, we consider whether improvements in investor protection and underwriting have resulted in lower underpricing over the course of the last century….investors were considerably better protected after 1945 due to substantial reforms in company law, accounting standards and the LSE’s own rules. Similarly, reputable banks committed themselves to underwriting IPOs after 1945.
Based upon a narrowing of information gaps and the benefits of certification, we would expect both these improvements…to moderate the level of underpricing over time. However, the main finding of this paper is that underpricing rose after the middle of the century when shifts in IPO risk composition, changes in issue method and underwriter reputation are taken into account.”
Why? The authors hypothesize:
“Possible reasons for this puzzle include the decline in competition from provincial stock exchanges, the market power of investment banks, and the deployment of underpricing as an anti-takeover device, which led to more heterogeneous investors and an exacerbated winner’s curse. Each of these offers an avenue for further research.”
See, I told you it is not what theory would have expected.
BTW the history reported in the paper is fascinating as well. For instance:
“…the large initial premia of Initial Public Offerings (IPOs) had been pointed out as early as 1929 (The Economist, 27 July 1929).”
Cite: Chambers, David and Dimson, Elroy, "Better Regulation and Underwriter Reputation have done Nothing for IPO Underpricing over the 20th Century: Empirical Evidence from IPOs on the London Stock Exchange" (