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The Effect of the Secondary Market on the Pricing of Initial Public Offerings: Theory and Evidence

Published online by Cambridge University Press:  06 April 2009

David C. Mauer  and
Lemma W. Senbet
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Abstract

This paper provides a theoretical and empirical investigation of the role of the secondary market in the pricing of initial public offerings. We argue that incomplete spanning of the primary issues in the secondary market and limited investor access play an important role in the pricing of initial public offerings. Utilizing a segmented market approach wherein IPO offering values are determined in the primary market and after-market bid prices are determined in the centrally accessed secondary market, we derive a price differential in the primary and secondary markets that is consistent with the received notion of IPO underpricing. Empirical tests on a large sample of IPOs provide results that are consistent with the predictions of our theoretical analysis.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 1 , March 1992 , pp. 55 - 79
Copyright
Copyright © School of Business Administration, University of Washington 1992

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