Winner's curse in initial public offering subscriptions with investors' withdrawal options

Contrary to fixed-priced initial public offering (IPO) subscribers in many other countries, IPO subscribers in Taiwan own the option to withdraw from their IPO allocations after learning the allocation rate (ALLOC). Investors' option to withdraw reduces the information asymmetry between informed investors and uninformed investors but increases the firmcommitment underwriting risk. We show that under investors' option to withdraw, uninformed investors can improve their performance by learning from the ALLOC and/or the withdrawal rate. Consequently, firm-commitment underwriters will absorb more overpriced shares. Unless underwriters are compensated directly by issuers, IPOs should be more underpriced to compensate underwriting activities under investors' option to withdraw.