Figure 163

Number of offerings

Year

Source: Roger G. Ibbotson, Jody L. Sindelar, and Jay R. Ritter, "The Market's Problems with the Pricing of Initial Public Offerings," Journal of Applied Corporate Finance 7 (Spring 1994), as updated by the authors.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VI. Cost of Capital and Long-Term Financial Policy

16. Raising Capital

© The McGraw-Hill Companies, 2002

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VI. Cost of Capital and Long-Term Financial Policy

Jay Ritter on IPO Underpricing around the World

The United States is not the only country in which initial public offerings (IPOs) of common stock are underpriced.

The phenomenon exists in every country with a stock market, although the extent of underpricing varies from country to country.

In general, countries with developed capital markets have more moderate underpricing than in emerging markets. During the Internet bubble of 1999-2000, however, underpricing in the developed capital markets increased dramatically. In the United States, for example, the average first-day return during 1999-2000 was 65 percent. At the same time that underpricing in the developed capital markets increased, the underpricing of IPOs sold to residents of China moderated. The Chinese average has come down to a mere 257 percent, which is lower than it had been in the early and mid 1990s. After the bursting of the Internet bubble in mid-2000, the level of underpricing in the United States, Germany, and other developed capital markets has returned to more traditional levels.

The table below gives a summary of the average first-day returns on IPOs in a number of countries around the world, with the figures collected from a number of studies by various authors.

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