Industrial Diversification and the Underpricing of Initial Public Offerings
2013, Financial Management
Scott B. Smart, Thomas Boulton, Chad Zutter
The initial public offerings (IPOs) of diversified firms, those reporting more than one business segment at the time they go public, experience less underpricing than do IPOs by focused issuers. We explore two explanations for this phenomenon. Diversification may benefit IPO firms by reducing information asymmetries and therefore, lowering underpricing costs. Alternatively, high quality focused firms may be signaling their value by underpricing their shares to a greater degree. Though we find at least some evidence consistent with each explanation, a majority of the evidence favors signaling.
Smart, Scott B., Thomas Boulton, and Chad Zutter (2013), "Industrial Diversification and the Underpricing of Initial Public Offerings," Financial Management, 42(3): 679-704.