In the U.S., IPOs are underpriced. During the period of significant research, there were no structural changes in the way prices were determined. However, in Japan there were two major structural changes in the IPO pricing mechanism. We investigate whether public policies that changed the IPO pricing regimes can reduce the level of initial returns. We find the changes that removed price limits and introduced public auctions reduced the level of initial returns significantly. Thus, public policy can reduce, but not eliminate underpricing. Developing capital markets with significantly higher levels of underpricing, should consider introducing auctions to reduce initial returns.
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