IPO underpricing and limited attention: Theory and evidence

Laura Xiaolei Liu, Ruichang Lu, Ann E. Sherman, Yong Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

5 Citations (Scopus)


Earlier research indicates that attracting pre-offer investor attention yields long-term benefits to an initial public offering (IPO) issuer. For investors with limited attention, we model a way in which firms may attract attention: through underpricing their IPO, and using the expected allocations of underpriced shares to induce investors to attend the road show and consider the offering. 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 gray 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.

Original languageEnglish
Article number106932
JournalJournal of Banking and Finance
Publication statusPublished - Sept 2023


  • Crowdinvesting
  • Direct listings
  • Equity crowdfunding
  • Initial public offerings
  • Investor attention
  • IPO underpricing
  • JOBS Act
  • Limited attention
  • Media
  • pre-IPO trading

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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