Information Collection and IPO Underpricing



This study provides new evidence that IPO underpricing is economic rents paid for investor to gather costly information. Subrahmanyam and Titman (1999) report that diverse investor information, once aggregated in the public market, could provide a more informative stock price and accurate feedback to firm’s investment decision. I investigate the hypothesis that IPO underpricing as economic rents could be higher, when investor information is diverse. In support of this hypothesis, I find a positive and significant correlation between the extent of underpricing and the information diversity measure proposed by Barron et al. (1998). There is a positive and significant correlation between this information diversity measure and an IPO firm’s subsequent (absolute) change in capital and R&D expenditures. In addition, firms with high information diversity measure and change in subsequent investment exhibit a better subsequent return performance than firms with low diversity and change in investment. This is consistent with the proposition that investor information serves as useful feedback for managers in the IPO market.

Key Words

IPO underpricing information production information diversity 


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Copyright information

© Springer Science+Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Department of FinanceCollege of Business Administration, University of IllinoisChicago

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