Industrial Diversification and Underpricing of Initial Public Offerings

Abstract

Diversified IPOs, firms reporting more than one business segment at the time of going public, experience less underpricing than do IPOs by focused issuers. We explore two explanations for this phenomenon. Diversification may benefit IPO firms by reducing information asymmetries and hence, lowering underpricing costs. Alternatively, higher quality focused firms may underprice their shares more to signal their quality to the market. Though we find at least some evidence consistent with each explanation, a majority of the evidence favors a signaling story.