Initial Public Offerings (IPOs)

Dustin R. Schuette

Barcelona 1
CONTENTS

1. Definition of IPOs
2. Benefits and Costs of IPOs
3. The process prior to IPOs
4. Pricing Methods
5. Three Puzzling Characteristics of IPOs

2
IPO Case Study

Case: Netscape IPO → important information

• Please carefully read the information in the syllabus regarding the case study
• The Netscape case files will be uploaded into Moodle directly after the last class on IPOs, i.e. the
evening of Nov 10th
• All case assignments / essays need to be handed in to Moritz Greiwe via email:
moritz.greiwe@esade.edu
• Files sent via email should be in PDF format and no larger than 3-4MB, max 5 pages, min font
size 11; Font = Arial; line spacing at least single
• The Netscape Case essay must be handed in (email arrival time) by latest 18.11.2020 23:59
– any group missing the deadline will receive 0 points (please ignore the Syllabus deadline) →
make sure the email left the “outbox” and is under “sent emails” – we will not send out receival
confirmations
• For any questions regarding problems with the case, please directly contact Moritz Greiwe. Please
note: content questions will only be answered after the case has been handed in
• Make assumptions wherever necessary to properly answer the case questions (e.g. for firm
evaluation purposes). If you make assumptions, make sure to document and justify them
• Do not embed complete excel files in the PDF or send excel files separately. Only one PDF file is
to be sent per group. Correspondingly, please include excels tables where applicable directly in
the PDF → make sure to properly show your calculations (either via textual descriptions or more
detailed tables) 3
1.
Definition of IPOs

4
Definition of IPOs

Equity Issues

• An Initial Public Offering (IPO) is defined as a company’s first offering of shares

to the general public.
− Keywords:
• “first”: the firm was previously a private firm
• “general public”: this is not a private placement

• A Seasoned Equity Offering (SEO) is an equity issue by a firm that is already public.
As in an IPO, the shares issued can be primary or secondary shares

• In a primary offer:
− The shares offered are new shares being issued by the company
− The money raised by selling these shares is invested in the firm

• In a secondary offer:
− The shares are sold by current insiders (e.g. founder of the company or venture
capitalist)
− The money raised by selling these shares goes to their previous owners
5
2.
Benefits and Costs of IPOs

6
What are the key benefits of IPOs?

Benefits of IPOs

• New funds: New sources of financing if current (e.g. internal funding) sources exhausted →
opportunity to substitute debt and decrease leverage
• Lower funding costs: Increased liquidity in company stock increases its value
• Transparency:
− Higher disclosure requirements → more available information
− Increased information processing → analysts (via recommendations) and stock market (via
stock price) continuously process available information
− Higher visibility → Particularly important for new industries, or small companies that want to
build a strong brand
− Increased investor scrutiny → More monitoring, more efficient performance evaluation,
better investment decisions
• IPOs offer an exit for financiers → BUT: lock-up periods and limitations by regulation and by
investment banks need to be taken into account
• Mergers and acquisitions
− It is easier for other companies to notice and evaluate a public firm for potential synergies
− IPOs and SEOs are often used to finance acquisitions

7
What are the key costs of IPOs?

Costs of IPOs

• Going public is a costly process:

− Direct costs: approx. 7% via underwriting fee, legal fees, regulatory fees, taxes, etc.
− Indirect Costs: IPO is a lengthy and work-intensive process → high opportunity cost of time
for management
• Ownership dispersion and loss of control:
− Example: hidden plans from Porsche to take over VW
• Compliance with all the requirements of a public company (e.g. disclosure and audit
requirements)
• Increased disclosure and scrutiny
− High costs of producing information to fulfil disclosure requirements
− Cannot hide negative information from competitors
− Much time / funds spent on investor relations
• Perception dependency: The value of the firm becomes more dependent on external perception
• Stock is susceptible to all kinds of market errors and imperfections, e.g. fat finger errors, index
replication trading phenomena, overshooting…

8
3.
The process prior to IPOs

9
Before the IPO: Suit-up and put on your good shoes!

Firms “window-dress” to look good for investors

• Before IPO, no publicly traded price of the firm that “condenses” all
information → high information asymmetry between private firm and
potential investors
• Managers have certain degree of “managerial discretion” in reporting,
e.g. with respect to wording of certain information of accounting choices
• Window-dressing comprises activities to give the firm a temporary better
look from a financial perspective to attract investors
• Key window-dressing activity = Earnings management: companies may
temporarily inflate earnings (e.g. via reducing depreciations and
amortizations)
• BUT: what happens after the IPO?

10
How does a standard Initial Public Offering work?

Process of a standard IPO in six steps

• Investment bank should have industry experience

Choose an • Client base and reputation are key
Investment • Agree on IB contract: Firm commitment vs best efforts (deep dive below)
Bank • Lead IB / Underwriter then usually forms a banking syndicate → spreading
risks of deal and expand capacity to sell

• Source:
CNN
Money
• MS won
largest part
• Source: Facebooks IPO Filing of all 2011
tech IPOs
• 6 key underwriting parties,
headed by Morgan Stanley as
lead underwriter

11
How does a standard Initial Public Offering work?

Process of a standard IPO in six steps

• Lead IB is valuing the private business

Assess value
• Price often set “per share”, hence number of shares often acts as “the plug”
and set offer
• If investment bankers guarantee the price → tendency to reduce the price
details by 10 – 15% to buffer against errors

• IB sales team meet with portfolio managers and key investors to sound the
offering price = “building the book”
Gauge investor • IB gets the anchor investor
demand • Process often accompanied by road shows
• If demand very strong (weak) price is raised (lowered)

• Prepare firm for regulatory compliance with public firm standards

Reg. filings &
• In US: file registration statement with SEC
prospectus • Prepare and publish prospectus for potential investors

12
How does a standard Initial Public Offering work?

Process of a standard IPO in six steps

• Once actual offering is opened, investors start to request shares

• (Lead) IB allocates available shares across syndicate / investors
Allocate • If demand > supply, IB rations shares → can choose who to sell to and “make
shares friends”
• If supply > demand & IB guaranteed the deal → IB buys the remaining shares
at offering price

• On offering date, shares open for trading:

− If priced too low → shares jump up and investors partaking in IPO will make
Manage IPO sudden profit → bad for company that initially needed to collect the funds
− If priced too high → shares fall; investors loose → bad for reputation of
and post-issue
investment bank
phase • Post-issue management = potential support for stock in case of high volatility
(“stabilization activities”) → establishes a floor price (usually at or mildly
below offering price) to allow investors to get out

13
The Process of an IPO

Deep Dive 1: The prospectus & red herring

• Contains all the details of the IPO

− Number of shares offered
− Major ownership stakes before/after IPO
− Discussion of business and historical financial data
− Use of proceeds
− Risk factors – e.g. disclose lawsuits
− Discussion of board / management
• In US, they appear in EDGAR, SEC database
• Red Herring: prospectus is so important that usually a preliminary version (“red
herring”) is filed with SEC
− Serves as information for investors while IPO is still “in the making” + lower
information regulation → may represent company too positively
− Deliberately still missing key information on issue (price, number of shares)

14
What are is the key form that a company in the US
has to file for going public?

Deep Dive 1: The prospectus & red herring – Facebooks Red Herring

• https://www.sec.gov/Archives/edgar/d
ata/1326801/000119312512034517/d
287954ds1.htm

• Form S-1 = SEC filing used by

companies planning on going public
to register their securities with the U.S.
Securities and Exchange Commission
(SEC) as the "registration statement by
the Securities Act of 1933"

• Preliminary information disclaimer

usually in bold red lettering →
“red” herring

15
What are the two kinds of contracts usually made between the
IPO firm and the investment bank in terms of compensation?

Deep Dive 2: The IB contract

Two possible contracts with investment banks:

• Firm Commitment:
− Underwriter guarantees the deal → buys the stock and resells it to the
public
− Underwriter bears the uncertainty of the issue → to buffer against
potential errors, IB underprices issue by 10 – 15%
− Compensation via underwriting commission (difference between share
prices as bought by IB from private firm and sold by IB to public investors)
− Most common method by US reputable banks

• Best Efforts:
− Underwriter does not guarantee that the stock will be sold
− Company bears the uncertainty of the issue
− Compensation via flat fee (e.g. 100.000 USD)
16
What is a green shoe option?

Deep Dive 3: Allocation of shares and overallotment

• Within firm commitment contracts, investment banks typically sell more than
100% of the shares offered
• Almost all IPOs include overallotment option → IB has the right to sell up to
15% more shares than initially guaranteed by the IB
− Overallotment option called “Green Shoe Option”; Green Show
Manufacturing IPO in Feb 1963 was the first IPO to include such an option
• If IB expects aftermarket demand to be hot → presell 115% of the issue, with
the expectation to exercise the overallotment option
• If IB expects aftermarket demand to be low → presell 135% of the issue
− Shares above 115% are sold “short” (IB does not own them)
− If aftermarket is cool, some investors who got allocated shares, directly “flip”
their shares in the market → IB can cover short, potentially at lower price
and “stabilize” the offering, and shares are “retired” (as if they never existed)

17
How much does it cost to go public?

Underwriting commission and issuance expense

Issuance costs by size of issue • Issuance expenses comprise legal and

administrative costs (prepare registration
statements, filing fees with SEC / stock
exchange etc.)

− Issuance expenses rather fixed price

component

• Underwriting commission = fee for IB =

spread between offering price and price
the IPO firm receives per share (see
above)

− Majority of IPOs raising between $20

million and $80 million have gross
spreads of exactly 7.0%

Size of issue in millions − Price for a service vs insurance

premium?
Underwriting commission Issuance expenses

Source: Ritter, 1998, IPOs, Contemporary Finance Digest

1.767 US IPOs from 1990 - 1994 18
How much does it cost to go public? – an updated
view without any updates…

Contract with Investment Bank in US

Figure 1. Gross spread distribution for moderate size IPOs. The sample consists of 3,705 firm commitment (bookbuilding +
auctions) IPOs from 1980 through 2012 with global proceeds of at least $20 million but less than $80 million (expressed in
terms of dollars of 1998 purchasing power, which is the equivalent of $28 million to $111 million in 2012) before the exercise of
the overallotment option. Closed-end funds, REITs, ADRs, limited partnerships, bank and S&L IPOs, IPOs with an offer price below
$5, and unit offerings are excluded from the sample. There are three categories of gross spreads expressed as a percentage of
proceeds: below 7%, exactly 7%, and above 7%. The percentage of IPOs in each category are from Panel A of Table 1 in Chen and
Ritter (2000 Journal of Finance) as updated by the authors.

19
4.
Pricing Methods

20
Pricing Methods

Three Pricing Methods

• Fixed-Price Offers: The investment bank, together with the company,

determine the price at which securities will be sold
− No investor involvement in pricing → no market feedback
− Price determination via financial modelling (discounted Cash flow
analysis) and industry multiples (price/earnings, price/sales, market
to book)

• Book-building: The investment bank determines a price range (via DCF /

multiples) and gets indications of interest from investors (after road-shows).
These indications are not binding
− Price range sounded with investors as part of road-shows or afterwards
− 100% of USA IPOs and 80% of IPOs worldwide use book-building

• Auctions: A market clearing price is set after bids are submitted

21
5.
Three Puzzling
Characteristics of IPOs

22
Puzzling Characteristics of IPOs

Three Puzzling Characteristics of IPOs

1. Short-Run Underpricing
− Necessary or not?
− Why is so much money “left on the table”

2. Cycles In The Number of IPOs

− "Hot issue" markets, for example 1999

3. Long-Run Underperformance

23
 1 Underpricing
What is underpricing?

1. Short Run Underpricing: offering price is “too low”

Stock price at which IB buys from firm (assuming fixed

1
Money 3 commitment contract)
Stock price

left on
the table 2 Stock price at which IB sells to market = offering price
2 3 Closing price of stock in market after first day
1

Time

• Underpricing: First trading-day closing price > Offering price

• Money left on the table = difference between the closing price on the first day and
the offer price, multiplied by the number of shares sold.
− This is the first-day profit received by investors who were allocated shares at the
offer price
− It represents a wealth transfer from the pre-IPO shareholders (i.e. owners) of the
issuing firm to the investors taking part in the IPO
24
 1 Underpricing
Is underpricing something bad?

There are mixed feelings on underpricing, depending on who is asked

• Before explaining the reasons for underpricing, we should note that minimization of
underpricing is not necessarily optimal. What is the actual IPO objective?
− Maximize firm value = maximizing aftermarket / long-term price
− Maximize proceeds to selling shareholders = maximize offer price
− Minimize costs associated with the going public process = minimize spread
between price offered by IB and market offering price
➢ Underpricing also expensive for Investment Bank, since commission is
based of offering price which obviously could have been set higher

• It is clear though: underpricing initially leaves the issuing firm with money left on the
table at the time of the IPO, BUT:
− Loss is a function of the percentage of the firm offered in IPO
− If only 10% of firm are offered in IPO → underpricing manageable for owners

25
 1 Underpricing
What is the magnitude of underpricing?

Evidence: Underpricing heavily depends on the issue size

Underpricing in %

<2 2 – 3.99 4 – 5.99 6 – 9.99 10 - 120

Size of issues (in m$)
Source: Ibbotson, Sindelar, and Ritter (1994)

26
 1 Underpricing
Why is there underpricing in the IPO market?

Explanations for Underpricing

• Many different reasons and theories for underpricing

• Not only “one truth”: reasons are not mutually exclusive, and their
relative importance differs across countries and contractual
mechanisms and time

• Some of the reasons we can mention are:

− Winner’s Curse
− Signalling Hypothesis
− Corruption
− Informational Cascades.
− Lawsuit Avoidance.
− Others…

27
 1 Underpricing
What is the winner‘s curse?

Winner’s Curse Argument: if you get it all, it might not be that good

• Pre-IPO = strong information asymmetries

− Between firm and investors
− Among investors → informed and less / unfirmed investors

• Underpricing is necessary to attract all investors

− Informed investors only partake in “attractive” / underpriced IPOs
− Uninformed investors cannot identify attractive IPOs, they partake in all IPOs
− If uninformed investors are allocated shares → must assume informed investors did not partake in
IPO → uninformed investors might fear to be make mistake and not partake in IPO

• The uninformed investors will only submit purchase orders if, on average, IPOs are underpriced
sufficiently to compensate them for partaking in all IPOs
− If IPOs are priced fairly, on average, uninformed lose:
− Uninformed investors partake in all IPOs, overpriced and underpriced IPOs,
− Uninformed investors get the Lion’s share of the overpriced ones
− IPO market needs uninformed investors → underpricing

• Looking at the evidence:

− Smaller, less well-known firms prone to more information asymmetries → Smaller issuances prone to
include more underpricing
28
 1 Underpricing
What is IPO signalling?

Signalling Argument: if you can pay the price, you must be a good firm

• Underpricing = price paid by the issuing firm to signal a good firm

• Good firms are willing to pay this signalling price because, after a superior performance, they hope
to can recoup the cost of this signal from subsequent issues

• Bad firms prone to have worse overall performance. Hence, it is more costly for bad firms to “imitate”
good firms in lowering the IPO price, since it is not clear if they at all will have a subsequent issue

Signalling argument is based on the idea that IPOs are preludes to SEOs

• Fact: Insiders tend not to sell that many shares at the IPO stage → Welch (1989) finds that 1/3 IPOs
are followed by a SEO within a few years

• There must be some reasonable assurance that the “window” will be open when the firm wants to
return to the market.

• But: Further empirical studies have shown: no statistical evidence for relation between underpricing
returns and the success of SEOs

29
 1 Underpricing
What is underpricing corruption?

Corruption Argument: CEOs hire underpricing IB to „join the club“

• Underpriced IPOs are a business of “windfall profits” → everyone wants to join the club

• In order to join the club, issuing firms’ executives hire Investment Banks who generally underprice →
underpricing of the IPO firm is the “club entrance fee” (“paid” by the firm’s pre-IPO owners)

• Subsequently, executives receive the ability to participate in other, later hot IPOs of the same
investment bank → the payment / bonus of the executives is the underpricing windfall

− This is done by setting up a personal / private brokerage account for these individuals and then
allocating hot IPO shares to these accounts (irrespective of their function as executives)

• Manifestation of serious agency problem, but only possible if pre-IPO owners already outsourced
management to executives

• Example: In August 2002 documents were released by the US House of Representatives Financial
Services Committee showing that Salomon Smith Barney (SSB) allocated hot IPOs to chief
executives of many telecommunications firms during 1996-2000

− Of course, during this period SSB had a large market share of equity underwriting and M&A
business in this industry!

30
 1 Underpricing
What are informational cascades within IPOs?

Informational Cascade Argument: if they do it, I should do it too…

• Investors may not only pay attention to own information but also to the activities of other investors

• → If other investors participate in the IPO, it must be a good IPO!

• In this context, “cascade” relates to the fact that there must be a “first” informed investor to buy in
order to reveal that the issuing firm is a good firm → this information will cascade down to less well
informed investors

• But that also means: If an investor sees that no one else wants to buy, investor may decide not to buy
even when in possession of favourable information → “hold up scenario”

• To prevent this from happening, an issuer may want to underprice an issue to induce the first few
potential investors to buy and induce a cascade of all other investors.
− Avoid negative informational cascades: thus underprice

• In practice, many IBs solve the hold-up scenario via an “anchor investor” (large reputable firm / bank
/ fund / investor who is the first to join the party)

31
 1 Underpricing
How are lawsuits connected to underpricing?

Lawsuit Avoidance Argument: if investors make money, they can’t sue us

• Only investors who lose money are entitled to damage compensations → Frequency and severity of
future lawsuits can be reduced by underpricing

• Underpricing the IPO is a very costly way of reducing the probability of a future lawsuit

• Example: Facebook IPO in 2012

− A month after IPO, the price was down around 25% relative to offering price.
− On the basis of this performance, more than 40 lawsuits were filed regarding the IPO

• But: Further empirical studies have shown: no difference in underpricing between IPOs that were
followed by lawsuits and IPOs that did not entail lawsuits

32
 1 Underpricing
What are other explanations for underpricing?

Other Explanations

• Dispersed Ownership Hypothesis:

− Managers do not like large block holders – threat.
− Underpricing implies oversubscription.
− Rationing in favour of small shareholders.

• There is no underpricing (behavioural):

− What you see is a speculative bubble.
− Offer price is fair price - first aftermarket price is too high.
− Implication: price should decline when bubble bursts.

33
 2 IPO cycles /
Why is there such a large variation in the number of waves
IPOs over time?

2. Cycles in the Number of IPOs

• There are IPO Waves:

− Number of IPOs strongly differ per year
− Hot markets: many IPOs
− Cold markets: fewer IPOs
− Relation to business cycle and equity offering markets make sense:
− Hot markets: firms need funds → IPO
− Hot markets: firms have higher share price → SEO

• But:
− Business cycle variables explain little of the variation in the number of IPOs
− Variation in IPOs numbers = too large to be only explained by the business cycle

34
 2 IPO cycles /
How did IPO numbers evolve historically? waves

2. Cycles in the Number of IPOs: US

In 1980-2000, an average of 310 firms went public every year

In 2001-2012, an average of 99 firms went public every year

Number of Offerings (bars) and Average First-day Returns (yellow) on US IPOs, 1980-2012
35
 2 IPO cycles /
How can we explain IPO cycles? waves

2. Cycles in the Number of IPOs

• Two contrary theories to explain IPO waves:

− Irrational market theory
− Efficient market theory

• Theory #1: Irrational market story

− The level of optimism in a society and thereby its economy fluctuates. It
holds that there are times when people are just plain optimistic and
thus more prone to make certain investments. Likewise, there are also
times when they are pessimistic, and they won't buy much (see e.g.
corresponding national indices like IFO consumer index)
− This theory says that markets run hot and cold based on investor
sentiment
− Of course, this theory is not the most popular with “efficient markets”
economists

36
 2 IPO cycles /
How can we explain IPO cycles regarding IPO waves
numbers?

2. Cycles in the Number of IPOs (cont.)

• Theory #2 is the efficient market story

− The quality of investment opportunities varies with time (e.g. invention of the
internet sparked numerous new business models and strong economic expansion)
→ a clustering of such investment opportunities leads to a “hot” IPO market;
investing in these companies is great as they are going to use the money well
− On the flipside, at other times there are not very good investment opportunities
− Investors will rationally believe that a company that tries to issue at such a time
must be desperate, and, therefore, will not pay much for the company’s stock →
market is turning “cold”
− Under this theory, firms (whether good or bad investments) tend to issue stock to
the public at times when there are great investment opportunities (IPO “timing”),
as that's when investors are willing to buy and pay more → amplifies the clustering
of IPOs, irrespective of firm quality

37
 3 Long-term
Puzzling Characteristics of IPOs underperformance

3. Long-Run Underperformance

• Annual returns on IPOs in the 5-years after issuing are reported,

along with benchmark using either size or style-matching
− Matches are based upon size (market cap) and style (book-to-market)

• IPOs have underperformed other firms of the same size by an

average of 5.2% per year during the 5 years after issuing, not
including the first day return
− Seems to go against efficient, rational markets
− However:
− Still don't know whether this is a pervasive phenomenon
− We do not have a consistent theory to explain this systematic
pattern

38
 3 Long-term
Puzzling Characteristics of IPOs underperformance

3. Long-Run Underperformance
Percentage returns on IPOs from 1970-2002 during the first five years after issuing
Geometric
First Six Second Six First Second Third Fourth Fifth
Mean
Months Months Year Year Year Year Year
Years 1-5

IPO firms 6.3% 0.0% 6.6% 5.0% 9.1% 13.7% 11.6% 9.2%
Size-matched 4.6% 5.3% 10.2% 13.8% 14.2% 16.3% 12.4% 13.4%
Difference 1.7% -5.3% -3.6% -8.8% -5.1% -2.6% -0.8% -4.2%
No. of IPOs 7,428 7,362 7,381 7,427 6,522 5,565 4,759

IPO firms 6.7% 0.2% 7.1% 7.5% 9.8% 13.1% 9.7% 9.4%
Style Matching 2.4% 4.4% 7.6% 11.6% 12.9% 16.5% 10.8% 11.8%
Difference 4.3% -4.2% -0.5% -4.1% -3.1% -3.4% -1.1% -2.4%
No. of IPOs 7,026 6,982 6,999 6,888 6,045 5,135 4,366

Percentage returns on IPOs from 1990-2002 during the first five years after issuing
Geometric
First Six Second Six First Second Third Fourth Fifth
Mean
Months Months Year Year Year Year Year
Years 1-5

IPO firms 8.4% 0.7% 9.2% 5.3% 8.7% 20.5% 10.2% 10.7%
Size-matched 5.8% 7.3% 13.8% 16.1% 15.0% 21.2% 12.5% 15.9%
Difference 2.6% -6.6% -4.6% -10.8% -6.3% -0.7% -2.3% -5.2%
No. of IPOs 4,638 4,582 4,591 4,428 3,680 2,930 2,350

IPO firms 8.3% 0.5% 9.0% 6.2% 8.4% 21.0% 10.2% 10.8%
Style Matching 4.0% 6.7% 12.3% 12.8% 15.3% 24.2% 10.1% 14.8%
Difference 4.3% -6.2% -3.3% -6.6% -6.9% -3.2% 0.1% -4.0% 39
No. of IPOs 4,453 4,418 4,426 4,285 3,586 2,872 2,303
 3 Long-term
Puzzling Characteristics of IPOs underperformance

3. Long-Run Underperformance (cont.)

Three hypothesis for long-run underperformance (behavioral flavor):

• The divergence of opinion hypothesis (Miller 1977): Investors who are most
optimistic about an IPO will be the buyers. If there is a great deal of uncertainty about
the value of an IPO the valuations of optimistic investors will be much higher than
those of pessimistic investors. As more information becomes available, the divergence
of opinion between an optimistic and a pessimistic will narrow. Prices drop → IPOs
underperform in the long run.

• The impresario hypothesis (Shiller 1990): IPOs are underpriced by investment

bankers (the impresarios) to create the appearance of excess demand, just as the
promoter of a rock concert attempts to make it an “event”. Shiller predicts that firms
with highest initial returns, should have the lowest subsequent returns.

• Windows of opportunity hypothesis: If there are periods when investors are

especially optimistic about the growth potential of companies going public, the large
cycles in volume may represent a response by firms to “time” their IPOs taking
advantage of investor sentiment. This hypothesis predicts that firms going public in
high volume periods are more likely to be overvalued than other IPOs. Prediction:
High-volume periods should be associated with the lowest long-run returns. This
pattern indeed exists. 40
MAIN TAKEAWAYS SESSION 5

1. An Initial Public Offering (IPO) is defined as a company’s first offering of

shares to the general public.

2. Benefits and Costs of IPOs

3. The process prior to IPOs:

− Choose investment bank / lead underwriter
− Assess value and set offer details (e.g. IB contract)
− Gauge investor demand / start book-building
− Generate regulatory filings and prospectus
− Allocate shares
− Conduct IPO and stabilize issuance first month

4. Pricing Methods: book-building

5. Three Puzzling Characteristics of IPOs

• Short-Run Underpricing
• Cycles In The Number of IPOs: "Hot issue" markets
• Long-Run Underperformance 41