Underpricing And Ex-Post Value Uncertainty

As documented by a vast empirical literature, IPOs are characterized by underpricing. A number of papers have shown that underpricing is directly related to the amount of ex-ante uncertainty concerning the IPOs valuation. Recent theoretical papers propose that not all value uncertainty is resolved prior to the start of trading, but rather continues to be resolved in the beginning of the after market. The authors term this type of uncertainty as ex-post value uncertainty and develop proxies for it. They find strong support for the existence of ex-post value uncertainty and find that including a proxy for it more than doubles the explanatory power of previous models.