As I presented in the previous sections, there are numerous explanations advanced to
understand and to clarify the short run IPO anomaly. These explanations can be classified in
three main categories:
Explanations based on asymmetric information between the key IPO parties and have
been considered the most convincing explanations for decades.
Explanations asserting the informational transparency and lucidity and asserting the IPO
market efficiency.
And explanations based on Behavioral Approach and on investors’ sentiments and
beliefs.
I regroup the three theories advanced in the same model to determine which of these
explanations characterizes best the data in the context of a unified model and presents the
most relevant and reliable explanation to underpricing phenomenon. I present every theory by
one or more indicators and determinants.
For the informational asymmetry theory, I use the firm quality as a determinant with
many proxies: the Overhang Ratio, Venture Capital backed, Underwriter reputation and
R&D intensity.
For the theory asserting the IPO market efficiency, I use the risk determinant: age of the
issuing firm, firm size (sales and assets), firm profitability, ROA and the issue risk (if
the firm operates in a technological and risky sector). I use also the issue size (Ln
(expected proceeds)), and the issuer bargaining power.
Finally, for the behavioral approach, I use direct measures of investor sentiment, and I
distinguish between the two types of investors: the individual investor sentiment and the
institutional investor sentiment. For this, I use the individual investor sentiment index
(AAII) and the institutional investor sentiment index (II).
The regression model used in this study is as follows:
Underpricing = a0 + a1Underwriter Reputation Dummy + a2Overhang + a3R&D
Intensity + a4VC Dummy + a5Ln (1+age) + a6Ln (assets) + a7Ln (sales) + a8Firm
Profitability + a9ROA + a10Issue Risk Dummy + a11Ln (expected proceeds) + a12Insiders
Ownership + a13Institutional Ownership + a14Blockholders Ownership + a15Individual
Investor Sentiment + a16Institutional Investor Sentiment+ a17Time Dummy + εi