IPO Pricing in the Dot-com Bubble

IPO initial returns reached astronomical levels during 1999-2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by a variety of marked changes in pre-IPO ownership structure and insider selling behavior over the period, which reduced key decision-makers’ incentives to control underpricing. After controlling for these changes, the difference in underpricing between 1999-2000 and the preceding three years is much reduced. Our results suggest that it was firm characteristics that were unique during the “dot-com bubble” and that pricing behavior followed from incentives created by these characteristics. * Ljungqvist is from the New York University Stern School of Business and the Centre for Economic Policy Research, London. Wilhelm is from the Oxford University Saïd Business School and the University of Virginia McIntire School of Commerce. We are grateful to Yakov Amihud, Edie Hotchkiss, Michelle Lowry, N.R. Prabhala, Jay Ritter, an anonymous referee, and especially Rick Green (the editor) for helpful comments. The paper has benefited from seminar presentations at the University of Florida, Georgetown University, and Oxford University. All errors are our own. † Address for correspondence: Stern School of Business, New York University, Suite 9-190, 44 West Fourth Street, New York NY 10012-1126. Phone 212-998-0304. Fax 212-995-4233. e-mail [email protected].