IPO Underpricing

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When companies go public, average prices of common shares go up on the first trading day. What sounds like a marvelous investment opportunity, raises the question why issuers are willing to „leave money on the table.“ This study presents a new approach based on irrational human behavior (e. g., prospect theory and herd behavior). Using a new data set of German equity offerings, the empirical test shows compelling support for the new approach. The control analysis covers a wide range of alternative proxies for information asymmetry, underpricing reduction, ownership, and regulation. Understanding the human dynamics of IPOs will help potential issuers and investors alike in making better decisions and serve regulators in alleviating future bubbles.