How does knowledge affect IPO pricing? A new approach grounded in the knowledge-based view
- Authors
- Eom, Chanyoung; Kang, Hyoung-Goo
- Issue Date
- Jul-2022
- Publisher
- EMERALD GROUP PUBLISHING LTD
- Keywords
- Initial public offering; Knowledge-based view; Book building; Institutional bidding; Underwriter' s learning; Institutional bidding information
- Citation
- JOURNAL OF KNOWLEDGE MANAGEMENT, v.26, no.7, pp.1849 - 1867
- Indexed
- SSCI
SCOPUS
- Journal Title
- JOURNAL OF KNOWLEDGE MANAGEMENT
- Volume
- 26
- Number
- 7
- Start Page
- 1849
- End Page
- 1867
- URI
- https://scholarworks.bwise.kr/hanyang/handle/2021.sw.hanyang/170296
- DOI
- 10.1108/JKM-02-2021-0148
- ISSN
- 1367-3270
- Abstract
- Purpose
This study aims to empirically validate that a knowledge-based view (KBV) is an important framework to understand price discovery processes in initial public offerings (IPOs) by emphasizing the unique feature of knowledge creation jointly invoked by underwriters and institutional investors during the book building phase.
Design/methodology/approach
The authors decompose underwriters’ incremental knowledge acquisition into objective knowledge – acquired from premarket bids – and subjective knowledge – which is orthogonal to the objective knowledge. The authors implement a multiplicative heteroscedasticity model to analyze how each knowledge component relates to the level and volatility (as a proxy of pricing uncertainty) of post-issue returns. The authors take the 2007 regulatory change as a quasi-natural experiment in which institutional investors were incentivized to provide true information.
Findings
For Korean IPOs, the authors find that the objective (subjective) knowledge component reduces (increases) both pricing uncertainty and underpricing. The authors also observe that the efficacy of the IPO knowledge creation critically depends on the quality of the information provided by institutional investors, as anticipated by the KBV literature.
Originality/value
Using fine-grained knowledge measures, the authors provide original, compelling evidence that objective (subjective) knowledge formulated from the IPO knowledge-creation processes de facto alleviates (worsens) underwriters’ pricing difficulties. This reinforces the importance of knowledge-based mechanisms in managerial decision-making processes.
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