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Asymmetric Information and the Role of the Underwriter, the Prospectus and the Analysts in Underpricing of IPOs: The Italian Case

Fabrizio, Stefano and de Lorenzo, Massimo, "Asymmetric Information and the Role of the Underwriter, the Prospectus and the Analysts in Underpricing of IPOs: The Italian Case" (February 2001). Available at SSRN:


    Many economists have given birth to extensive empirical and theoretical literature while trying to explain the reasons why companies choose to quote themselves at such a price as to generate underpricing. This paper, dedicated to the Italian situation, intends to examine the consistency of the main theories formulated to explain underpricing. Beginning from the Rock Theory (1986), based on the existence of asymmetric information, we examine the financial instruments that the issuers could make use of or which might be of interest in reducing the degree of uncertainty, and, therefore, the 'necessary' extent of underpricing to guarantee the good outcome of the placement. In reality, three main elements have been identified by means of which it is possible to spread information on the subscribing company and so reduce uncertainty in reference to its value and consequently its corresponding underpricing. These are: the issue prospectuses, the analysts' studies and the choice of the dealers responsible for carrying out the placement. These three aspects seem to deserve just consideration due, first of all, to their supposed capability of influencing underpricing itself; and, secondly because they are factors that also have a consistent impact in terms of implications for policy and usual practice. Even though the data demonstrates that as the quality of prospectuses increases there is less variation of underpricing, and that the number of studies produced by analysts are positively correlated with the dimension of the company quoted and with the quality of the prospectuses, we show from the analyses conducted that the variables utilized to estimate the uncertainty ex-ante of the value of the company are not sufficient in themselves to explain the variability of the cross-section of underpricing. In particular, neither the formation of underpricing nor overpricing (that is generated in a third of the total cases) are completely explained. With regard to the above, it may be necessary to dedicate greater attention to the ways in which the offering price is determined (considering the positive relation between the issuer and the dealers who take care of the placement) and shares allocated (with particular reference to the way the shares are divided between institutional and private investors). However these matters belong to related research fields and are not contemplated in the present paper. There are other areas of research related to the pricing of newly listed companies, especially with regard to the medium and long term trend (referring to underpricing for periods over a day - covering a range from a week to three months - and long run underperformance), to oversubscription and to the effects of the back up price policy carried out by the purchase syndicate after the quotation has taken place. These are undoubtely all very interesting topics that certainly have strong policy implications. However, when this study began insufficient data was available, and so these matters will be the object of future work.
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