Informational Cascades

Abstract:During the hot issue period 1999 - 2000, IPOs in Continental European stock markets reached astronomical levels of underpricing although underpricing varied from 21 percent in the French Nouveau Marché to 56 percent in the German Neuer Markt. We present evidence that a part of what has been called ‘underpricing’ was the reflection of the market looking for an equilibrium price at the start of quotations. An equilibrium price had not been reached because ex-ante uncertainty had not been resolved in the IPO book-building process. We find that the process of finding an equilibrium price took several trading days in the Nouveau Marché and even several weeks in the Neuer Markt.