Signaling in the Internet craze of initial public offerings

Melanie Cao, Shouyong Shi

Research output: Contribution to journalArticlepeer-review

12 Scopus citations


We explain the clustering of underpricing in initial public offerings (IPOs). The model features an industry with aggregate demand uncertainty and asymmetric information about firms' quality. In the IPO market, firms can signal quality by underpricing or under-issuing new shares. Expected aggregate demand for the industry's products increases with the publicity that the industry creates through IPO underpricing. We show that asymmetric information and expectations on aggregate product demand interact with each other to generate multiple equilibria. Underpriced IPOs cluster in one equilibrium but not in the other. We use these results to explain why the clustering often occurs in particular industries, is short-lived, and is sensitive to economic conditions.

Original languageEnglish (US)
Pages (from-to)818-833
Number of pages16
JournalJournal of Corporate Finance
Issue number4
StatePublished - Sep 2006

All Science Journal Classification (ASJC) codes

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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