The Pricing of Initial Public Offerings: An Option Approach
This chapter proposes a theoretical model of initial public offering by taking into account the uncertainty in security pricing and the underwriting process. Three major factors are shown to affect the IPO pricing: (1) the uncertainty of stock price, (2) the legal requirement that restricts underwriters from selling any part of the issue above the fixed offering price, and (3) the underwriters' risk tolerance. It is shown that underpricing is negatively related to the underwriter's risk tolerance, and positively related to the length of premarket period and market price volatility.
Finance and Financial Management | Portfolio and Security Analysis
Advances in Quantitative Analysis and Accounting
City or Country
LIU, Sheen; WU, Chunchi; and CHEN, Peter Huaiyu.
The Pricing of Initial Public Offerings: An Option Approach. (2008). Advances in Quantitative Analysis and Accounting. 6, 127-141. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/850