Academic journal article Academy of Banking Studies Journal

Underpricing of Bank IPO's in Intermediary-Oriented Marketplaces: A Test of Baron's Model on the Italian Market

Academic journal article Academy of Banking Studies Journal

Underpricing of Bank IPO's in Intermediary-Oriented Marketplaces: A Test of Baron's Model on the Italian Market

Article excerpt


Underpricing at the time of listing is a topic that for some time has attracted the interest of both academics and practitioners. It is a widespread and generalized phenomenon, extensively examined in literature, with a number of theories and models put forward to explain it.

This paper focuses on underpricing in IPOs (Initial Public Offerings) by Italian banks, with a view to establishing the relevance of bank specificity.

The analysis is pertinent for two reasons. First, it represents an in-depth study of the results reported in IPOs in a specific and important sector (banking). Second, this analysis is an "indirect" test of Baron's theory (1982), according to which underpricing stems from information asymmetry between the issuer and the intermediary participating in the placement. Although similar tests have previously been undertaken on this topic, none has thus far referred to European markets; hence, the importance of testing the theory in markets that, due to the role that banks assume, are more exposed to information asymmetry as Baron reported.

In general terms, we test if an explanation of underpricing may lie in the nature of the financial system, which can be intermediary-oriented (as in Europe) or market-oriented (as in the US).

In order to test our hypothesis, the mean and median underpricing of banks that were "self-placed" on the Italian stock market between 1985-2007 was calculated. This value was then compared with the mean and median underpricing registered by other firms listed in the same period. This comparison was undertaken because if underpricing occurs as a result of information asymmetry in favour of the intermediaries participating in the placement--when intermediaries themselves participate in the placement of their own securities--a significant reduction in underpricing in the listings should ensue.

A similar study conducted in 1989 in the United States (Muscarella and Vetsuypens, 1989), found no significant differences between banks and other firms in terms of underpricing. The US financial system, however, differs extensively from the European system, especially in Italy, where the capital market is relatively undeveloped with numerous small and medium enterprises. In Italy, and generally in the whole of continental Europe, banks are the prime source of funding of firms (Shleifer and Vishny, 1997; La Porta et al., 2000; Baran, 2008). As such, we could expect that the greater importance of banks in intermediary-oriented contexts would allow them to play a very different and much more important role in setting the placement price, as well as benefitting from greater information asymmetry (Bessler and Kurth, 2007). The purpose of the present study is to verify this hypothesis and, indirectly, to test Baron's model in a market oriented towards financial intermediaries.

Our findings reveal significantly lower underpricing for banks than other companies. This result appears to be consistent with Baron's hypothesis and suggests that this model may contribute to explaining underpricing in Italy and, potentially, in other intermediary-oriented markets.

The paper is organised as follows. The first section reviews the most relevant literature on underpricing, while the second section presents the Italian stock market sample surveyed. Section three presents the data and methodology. The results, demonstrating that banks in Italy, unlike other firms, have succeeded in minimising the indirect cost of underpricing in listings, are reported in section four. The concluding section discusses the validity of Baron's model for the Italian market.


The theme of underpricing has been widely discussed in literature (Ritter and Welch, 2002). Much attention has been paid to Ibbotson's noted definition (1975), stating that underpricing is the difference between the price of the first trading day and the price at which the security is offered on the market, which represents "money left on the table'"

Ibbotson's study measures underpricing by taking the closing price at the end of the first week of listing as the reference for a comparison with the offering price. …

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