Linking theories of incomplete contracts to empirics in IPO contracting

I examine the IPO underpricing phenomenon through the lens of incomplete contracts, where holdup is measured with the degree of IPO underpricing. Competing theories set forth a reason for why one type of IPO contracting (Firm Commitment Offering) is a more efficient contract than another (Best Efforts Offering). In particular, I highlight how i) allocation of bargaining power and ii) default option in the renegotiation process can be mapped to key features of the contracts. This paper demonstrates the general applicability of contract theories to study a well-known phenomenon of IPO underpricing.

Automated summary

This paper examines the IPO underpricing phenomenon through the lens of incomplete contracts, highlighting the efficiency differences between Firm Commitment Offering and Best Efforts Offering. The allocation of bargaining power and default options in the renegotiation process are identified as key features that can be mapped to the contracts. The general applicability of contract theories to study IPO underpricing is demonstrated.