Signaling in the Internet craze of initial public offerings

This version: 2001. In this paper we analyze the clustering phenomenon of underpricing in initial public of-ferings (IPOs), where ¯rms in a particular industry choose to issue their new shares at the same time and at great discounts. The industry consists of many ¯rms that have private in-formation about their own qualities (high or low) and that must raise external capital ¯rst before production. In the product market, ¯rms compete through quality ladders, where each high-quality ¯rm monopolizes the production of a particular variety of product. We show that self-ful¯lling multiple equilibria arise. In one, no ¯rm underprices the IPO. In the other, all high-quality ¯rms underprice their IPOs, resulting in clustering. Moreover, the clustering is more likely to occur in economic upturns than in downturns, and in an easy credit market than in a tight market