Why, how and to what extent do companies going public ‘underprice’? Rationales & practices

Going public is a strategic process which essentially consists of a stock market launch effected by a private company to the public. When the company issues or sells equity, then realizes an IPO (Initial Public Offering). After evidencing the principal features of such complex operation, the study tries to answer the question: why, how and to what extent (or degree), in the context of a IPO, companies do ―underprice‖ – thus recalling the relating rationales and practices. This common ―rule‖ or ―behavior‖ means, as obvious, a temporary raise from the issuing equity price to the first-day closing stock price. That said, after introductory technical notes, the paper analyzes the worldwide underpricing phenomenon – which is persistent in time though cyclical in size – in consideration of updated data and evidences from the main economies (also providing, for the first 100 IPOs in US, in 2016, a brief regression analysis in order to test some recent trends). Then, the several reasons and explanations which may support underpricing are detected, primarily, in information asymmetry (particularly due to uncertainty and imperfections), institutional incentives, changes in corporate governance mechanics, concerning regulatory aspects, ownership structure/control and agency costs (and also behavioral explanations or bias, sentiment etc.). An economic measuring criterion of the immediate abnormal returns, and the association to the long run (under)performance, are in conclusion stated.