The Facebook IPO Disaster: IPO Pricing as a Function of your Investment Banks’ Past Mistakes
Babson Associate Finance Professor Laurie Krigman and co-author Wendy Jeffus recently published a paper in the Journal of Corporate Finance, entitled IPO Pricing as a Function of your Investment Banks’ Past Mistakes: The Case of Facebook.
On May 18, 2012 Facebook held its initial public offering (IPO), raising over $16 billion. It became one of the largest IPOs in history.
To the surprise of many investors, there was no underpricing ― the stock closed the first day of trading flat from its offer price. The Facebook IPO was described as not only disappointing, but also detrimental to the broader market.
In their paper, Krigman and Jeffus explore why one IPO should have such widespread consequences. They document that the IPO market was silent for 41 days following Facebook. When it re-opened, the average level of underpricing increased from 11 percent pre-Facebook to 20 percent post-Facebook. The common blame was an overall increase in risk-aversion among investors. This paper offers an alternative explanation.
Krigman and Jeffus show that the entire increase in underpricing is concentrated in the IPOs of the Facebook lead underwriters. They find no statistical difference in underpricing pre and post-Facebook for non-Facebook underwriters. They argue that investment bank loyalty to their institutional investor client based propelled the Facebook underwriters to increase underpricing to compensate for the perceived losses on Facebook.
Laurie Krigman specializes in the study of initial public offerings, investment banking, and corporate finance. She has presented her work at numerous professional conferences and has published in leading academic journals including The Journal of Finance, The Journal of Financial Economics, the Review of Financial Studies, and the Journal of Corporate Finance.
Previously, Krigman was on the faculty at the University of Arizona where she taught at the undergraduate, MBA, and Ph.D. levels. Prior to returning to academics, she was a money manager with Trinity Investment Management Corporation. She holds a Ph.D. in Finance and Econometrics from the University of Colorado; an MBA in Finance/International Business from Syracuse University; and a B.A. in Economics from William Smith College.
Wendy Jeffus started her career at Merrill Lynch where she joined a team of investment advisors who managed private client assets. She has worked as a litigation consultant where she analyzed cases involving currency derivatives and tax matters. She has also served as the Chief Administrator for the Educational Investment Fund at Texas Christian University.
She has published papers on the topics of foreign direct investment in Latin America and shareholder wealth effects from acquisition announcements. Jeffus has taught courses in finance and international business at Boston College, Clark University, Florida Atlantic University, and Harvard Summer School. She has also delivered lectures in Canada, Morocco, Spain, and the United States.
Jeffus holds a Masters of Business Administration from Texas Christian University, a Masters of Science in Finance from Boston College, and a Doctorate of Business Administration from Southern New Hampshire University.