Limited Attention, Legalized Bribery and the Initial Public Offering Process

An initial public offering (IPO) is one time when a company can legally lsquo;bribe' institutional investors to pay attention to it ndash; investors that regularly attend road shows and give reliable feedback can expect allocations of underpriced shares in hot offerings. Our model generates a novel set of predictions regarding the relationship between initial returns and attention, retention, expansion and the benefits of attention, plus the asymmetry of the relationship with attention. Consistent with our model, investors' attention is positively related to both initial returns and the magnitude of price revision. The relationship between attention and underpricing is asymmetric, and stronger when ex ante uncertainty is greater. Our work has implications regarding direct listings, is consistent with partial adjustment to public information, explains the relative unpopularity of grey market/when-issued trading and predicts that, even if the JOBS Act leads to more active pre-IPO trading (through crowdinvesting/equity crowdfunding), underpricing will still occur