What is it about?
The time series variability of IPO underpricing has remained much of a puzzle. This study formally and theoretically generates five different levels of IPO underpricing that are produced by economic agents that are rational. The study further demonstrates that levels of underpricing generated can be duplicated by populations of irrational agents, with outcome presence of market efficiency does not imply initiating (originating) pricing events that are fully rational.
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Why is it important?
It typically has been assumed that evidence for market efficiency implies presence of agents that are rational within stock markets. This study provides evidence that this assumption can be violated. The study formally and theoretically develops a metric for assessing rationality of initiating (originating) pricing events within stock markets.
Perspectives
Study predictions demonstrate that one of five underpricing equilibriums generated has feasibility of generation of the stylized fact that value stocks tend to outperform growth stocks. Given all model predictions are obtained in context of risk neutrality, none of model predictions are influenced by asset specific risk.
Dr Oghenovo A Obrimah
Fisk University
Read the Original
This page is a summary of: The Demand for New Risky Equity and Prices in Public Equity Markets, SSRN Electronic Journal, January 2005, Elsevier,
DOI: 10.2139/ssrn.686701.
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