RESEARCH ARTICLE
How underinvestment reduces underpricing
Marco Bade,
Hans Hirth,
Corresponding Author
Marco Bade
ICN Business School, Université de Lorraine, CEREFIGE, Berlin, Germany
Correspondence
Marco Bade, ICN Business School, Université de Lorraine, CEREFIGE, Quartier 207, Friedrichstraße 76-78, 10117, Berlin, Germany.
Email: [email protected]
Search for more papers by this authorHans Hirth
Chair of Finance and Investment, Technische Universität Berlin, Berlin, Germany
Search for more papers by this authorMarco Bade,
Hans Hirth,
Corresponding Author
Marco Bade
ICN Business School, Université de Lorraine, CEREFIGE, Berlin, Germany
Correspondence
Marco Bade, ICN Business School, Université de Lorraine, CEREFIGE, Quartier 207, Friedrichstraße 76-78, 10117, Berlin, Germany.
Email: [email protected]
Search for more papers by this authorHans Hirth
Chair of Finance and Investment, Technische Universität Berlin, Berlin, Germany
Search for more papers by this authorFirst published: 29 April 2024
Abstract
We develop an economic model demonstrating that firms can benefit from committing to underinvestment. The model considers a firm's IPO, secondary-market trading and subsequent investment decision. We analyse the conditions under which underinvestment can paradoxically be advantageous despite reducing the fundamental value of the firm. The benefit of committing to underinvest post-IPO is expressed in reduced underpricing and thus a higher valuation during the IPO. We furthermore show that the firm may commit to an inefficient investment policy by appointing a manager with biased expectations or risk aversion. Our findings imply that, under certain conditions, firms are better off relying on biased managers when their initial outlook is poor, but risk-averse managers when their initial outlook is good.
CONFLICT OF INTEREST STATEMENT
The authors declare no conflicts of interest.
Open Research
DATA AVAILABILITY STATEMENT
Data sharing not applicable to this article as no datasets were generated or analysed during the current study.
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