How underinvestment reduces underpricing

We develop an economic model demonstrating that firms can benefit from committing to underinvestment. The model considers a firm's IPO, secondary‐market trading and subsequent investment decision. We analyse the conditions under which underinvestment can paradoxically be advantageous despite reducing the fundamental value of the firm. The benefit of committing to underinvest post‐IPO is expressed in reduced underpricing and thus a higher valuation during the IPO. We furthermore show that the firm may commit to an inefficient investment policy by appointing a manager with biased expectations or risk aversion. Our findings imply that, under certain conditions, firms are better off relying on biased managers when their initial outlook is poor, but risk‐averse managers when their initial outlook is good.

• Publication year

  2024

• Venue

  International Journal of Finance & Economics

• Publication date

  2024-04-29

• Fields of study

  Not labeled

• Identifiers
  DOI 10.1002/ijfe.2987
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

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