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Business & Economics

Initial Public Offering Underpricing Effect in Case of Eastern European Capital Markets
Cristian Paun, Paul Miclaus, Stefan Ungureanu

ABSTRACT. When companies go public to gather financial resources, the stocks they sell in an initial public offering (IPO) tends to be underpriced, resulting in a substantial price jump on the first day of trading. Underpricing of IPO has attracted important researching efforts in the last time. The existence of underpricing in IPOs is significant to different models used in their measurement. However, there is a lack of consensus on what can explain underpricing among different researchers. It is well known that IPOs are underpriced in virtually all countries and that the number of companies going public and the extent of underpricing fluctuate over time. There is a large body of theoretical work explaining IPO underpricing, and most theories have been subjected to rigorous empirical testing. This paper is a review of the principal theories that have been proposed to explain IPO underpricing and discusses the main empirical models used to measure it.

KEYWORDS: IPO, asymmetric information, underpricing, Central and Eastern Europe.

JEL classification: G15, G32, G34, G24.