Discussion of “Why Don’t Issuers Get Upset About Leaving Money on the Table in IPOs?”

Abstract

In this article, Loughran and Ritter (2001; hereafter LR) provide an interesting new theory and empirical analysis. In this discussion I would like to elaborate on their analysis in several ways. First, in Section 1 I review Microsoft’s IPO process, as documented in a 1986 Fortune article, and related this to the LR model and evidence. In Section 2 I briefly discuss the LR model and its implications, and the empirical findings presented in LR that support the model. In Section 3 I present some additional empirical evidence suggesting that the LR prospect-theory model can’t fully explain the IPO puzzles. Section 4 proposes an alternative explanation for these data: namely that the data are consistent with a bargaining game in which the issuers’, underwriters’, and investors’ bargaining power changes with business and industry cycles. Section 5 concludes. 1. The Microsoft IPO I would like to begin by looking at one particular IPO, that of Microsoft. Microsoft’s IPO took place on March 13, 1986. Over the period from October 1985 through the IPO date, reporters from Fortune magazine followed Bill Gates and his Microsoft team and Microsoft’s investment bankers from Goldman Sachs and Alex. Brown as they went through the IPO process. This process was documented in a July 1986 Fortune article entitled “Inside the Deal That Made Bill Gates $350 Million” [ Uttal (1986)]. This article gives a good summary of Microsoft’s IPO and is useful in providing background and perspective for LR’s article.