48 Vand. L. Rev. 964 (1995)
Inefficiency in the Market for Initial Public Offerings

handle is hein.journals/vanlr48 and id is 978 raw text is: Inefficiency in the Market for Initial
Public Offerings
Jonathan A Shayne and Larry D. Soderquist     48 Vand. L. Rev. 965 (1995)
The market for initial public offerings (IPOs) of common stock is
inefficient, and this fact is not reflected in securities law. New statistical
evidence shows that, on average, companies go public at times when the
general stock market is priced 22.7% higher than its normal level, and that
underwriters sell IPO stock at a further 12.5% premium to the prevailing,
high market. These two figures are based on the long-term performance of
IPOs and comparable non-IPO stocks over the period 1970 to 1990, and are
consistent with the beliefs of knowledgeable practicing investors.
The value and number of IPOs varies greatly from year to year, but
overpayment by the public averages out to at least $1.4 billion annually,
counting both of the aforementioned pricing phenomena. The effort to capture
this inefficiency draws resources away from productive economic activity and
so imposes a drag on national well-being beyond the amount of the overpay-
ment. To at least some degree, the short-term benefits to issuing companies
and investment banks are offset by the intense cyclicality of the IPO market.
Certain practices of underwriters facilitate IPO overpricing. These
practices include stabilization, issuance of unduly positive research reports on
recent IPOs, the syndicate penalty bid, and refusal to lend shares for short
sales. Securities law can and should be used to discourage or eliminate these

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