Habib and Ljungqvist (2001) argue that underpricing is a substitute for costly marketing expenditures. Using a data set of IPOs from 1991 to 1995, Habib and Ljungqvist report that an extra dollar left on the table reduces other marketing expenditures by a dollar. On the first sight, underpricing seems to be just a substitute for marketing expenditures since both have the same cost, but underpricing is much more interesting.
By going public and by underpricing and leaving money on the IPO table, issuing firms can achieve a total coverage media and good news in all media, which can be much more costly if the firm chooses to use publicity and marketing expenditures, mainly because we can not forget the possibility of recouping this money left on the IPO table if the firm has the intention to conduct Seasoned Equity Offerings in the future.
So, the issuing firm achieves a large coverage media and an important publicity without spending anything, since the money left on the IPO table will be recouped later. By underpricing, the investors who bought the IPO shares have confidence in the issuing firm, they are satisfied with the gains they retired from the IPO shares and from underpricing in the first day of trading. Optimistic about the value of this firm, these investors will easily accept the price the firm set for its Seasoned Equity Offerings at a later date. Even if the price is higher than necessary, they will accept it since they have confidence in this firm, and then all the money left on the table can be recouped by conducting Seasoned Equity Offerings in the future.(9)
9 As a support for IPO as a marketing event, Chemmanur (1993) proposes that this publicity could generate additional investor interest, and Demers and Lewellen (2003) suggest that the publicity could generate additional product market revenue from greater brand awareness.