Two Strategies for Selling IPOs: A Pre and Post IPO Bubble Analysis

44 Pages Posted: 23 Apr 2021 Last revised: 12 Oct 2021

See all articles by James C. Brau

James C. Brau

Brigham Young University

Joseph J. Henry

Rowan University - Accounting & Finance

Stephen R. Owen, Jr.

University of North Texas

Date Written: April 21, 2021

Abstract

This paper provides an economic model resulting in two distinct marketing strategies available to investment bankers. First, we hypothesize that an increased selling effort by brokers is used most effectively when the investment clientele is uninformed. Second, adjusting the offer price of the issue is hypothesized to be employed primarily in large IPOs with a clientele of sophisticated investors, consistent with Shiller’s Impresario Hypothesis. Our pre-IPO bubble (1981-1996) empirical results yield evidence supporting both selling mechanisms. Under-demanded small IPO issues are ‘pushed’ by the brokers, while some under-demanded large IPO issues instead increase the offer price, with large first-day turnover characteristics of flipping. Both types of issues experience large and significant negative long-term returns, as share prices eventually return to the equilibrium price. For the post-IPO bubble period (1997-2017), the Impresario Hypothesis is empirically supported, but the push strategy is not, indicating a partial shift in selling mechanisms post bubble.

Keywords: Entrepreneurial finance; Initial Public Offerings/Seasoned Equity Offerings; Underpricing

JEL Classification: G24, G30, G32, G40

Suggested Citation

Brau, James C. and Henry, Joseph J. and Owen, Jr., Stephen R., Two Strategies for Selling IPOs: A Pre and Post IPO Bubble Analysis (April 21, 2021). Available at SSRN: https://ssrn.com/abstract=3831302 or http://dx.doi.org/10.2139/ssrn.3831302

James C. Brau

Brigham Young University ( email )

TNRB 640
Marriott School
Provo, UT 84602
United States
801-318-7919 (Phone)
801-422-0108 (Fax)

HOME PAGE: http://marriottschool.byu.edu/emp/brau/

Joseph J. Henry

Rowan University - Accounting & Finance ( email )

Glassboro, NJ 08028
United States

Stephen R. Owen, Jr. (Contact Author)

University of North Texas ( email )

Denton, TX 76203
United States

HOME PAGE: http://stephenowen.net

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