Underpricing of Initial Public Offerings and Due Diligence Costs: An Empirical Investigation

Abstract

This article reports the results of a study of the underpricing of initial public offerings under the Corporations Law. The authors commence by outlining a number of theories that have been advanced to explain the persistent underpricing of the issuing company's shares. The authors then examine whether the introduction of due diligence requirements in the Corporations Law, motivated as they were by a desire to provide more credible information to investors in prospectuses, may reduce investor uncertainty and hence, underpricing. The authors report average adjusted underpricing of 11 to 14 per cent in two samples of IPOs. However, they do not find evidence that increased due diligence is associated with lower underpricing of IPOs.