Limited Attention, Legalized Bribery and the Initial Public Offering Process

61 Pages Posted: 14 Mar 2006 Last revised: 4 Aug 2020

See all articles by Laura Xiaolei Liu

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Ruichang Lu

Department of Finance, Guanghua School of Management, Peking University

Ann E. Sherman

DePaul University

Yong Zhang

Hong Kong Polytechnic University

Date Written: July 31, 2020

Abstract

An initial public offering (IPO) is one time when a company can legally ‘bribe’ institutional investors to pay attention to it – investors that regularly attend road shows and give reliable feedback can expect allocations of underpriced shares in hot offerings. Our model generates a novel set of predictions regarding the relationship between initial returns and attention, retention, expansion and the benefits of attention, plus the asymmetry of the relationship with attention. Consistent with our model, investors’ attention is positively related to both initial returns and the magnitude of price revision. The relationship between attention and underpricing is asymmetric, and stronger when ex ante uncertainty is greater. Our work has implications regarding direct listings, is consistent with partial adjustment to public information, explains the relative unpopularity of grey market/when-issued trading and predicts that, even if the JOBS Act leads to more active pre-IPO trading (through crowdinvesting/equity crowdfunding), underpricing will still occur.

Keywords: Limited attention, initial public offerings, investor attention, IPO underpricing, JOBS Act, pre-IPO trading, equity crowdfunding, crowdinvesting

JEL Classification: G32, G24, G14

Suggested Citation

Liu, Laura Xiaolei and Lu, Ruichang and Sherman, Ann E. and Zhang, Yong, Limited Attention, Legalized Bribery and the Initial Public Offering Process (July 31, 2020). Available at SSRN: https://ssrn.com/abstract=890602 or http://dx.doi.org/10.2139/ssrn.890602

Laura Xiaolei Liu (Contact Author)

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.pku.edu.lauraliu.cn/en-home.html

Ruichang Lu

Department of Finance, Guanghua School of Management, Peking University ( email )

Beijing
China

Ann E. Sherman

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
312-362-5499 (Phone)

Yong Zhang

Hong Kong Polytechnic University ( email )

Hung Hom
Hung Hom
Kowloon, AK HK HK
Hong Kong

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