The relationship between systematic risk and underpricing of the IPO market

Abstract

This study utilizer systematic risk as measured by its accounting beta to proxy IPO ex ante risk for examining the relationship between risk and underpricing. Unlike the IPO's standard deviation for returns, the risk measure employed by Ritter (1984), a firm's accounting beta is an ex ante factor available to investors before the initial public offering. Utilizing accounting betas from 701 firms, our regression analysis corrected for heteroskedasticity shows a positive relationship between accounting beta and the subsequent degree of underpricing. Thus, our finding suggests that systematic risk, as measured by an accounting beta, is a good proxy for ex ante uncertainty.

Citation

Almisher, M.A., Buell, S.G. and Kish, R.J. (2002), "The relationship between systematic risk and underpricing of the IPO market", Research in Finance (Research in Finance, Vol. 19), Emerald Group Publishing Limited, Leeds, pp. 87-107. https://doi.org/10.1016/S0196-3821(02)19005-8