A signaling argument has recently been developed whereby IPO underpricing is a signal of future firm value. Only higher quality firms can be expected to recover the cost of this signal through subsequent offerings of seasoned equities. This study uses three proxies for firm quality and finds evidence of a positive relationship between these measures of firm quality and reissuance activity. Greater IPO underpricing is also found to be associated with greater levels of future equity selling and higher levels of earnings per share.
IPO, IPO Underpricing, Reissuance, Firm Quality
Denning, Karen C.; Ferris, Stephen P.; and Wolfe, Glenn
"IPO Underpricing Firm Quality, and Subsequent Reissuance Activity,"
Journal of Small Business Finance:
1, pp. 71-86.
Available at: http://digitalcommons.pepperdine.edu/jef/vol2/iss1/6