How does knowledge affect IPO pricing? A new approach grounded in the knowledge-based view
Journal of Knowledge Management
ISSN: 1367-3270
Article publication date: 22 October 2021
Issue publication date: 26 July 2022
Abstract
Purpose
This study aims to empirically validate that a knowledge-based view (KBV) is an important framework to understand price discovery processes in initial public offerings (IPOs) by emphasizing the unique feature of knowledge creation jointly invoked by underwriters and institutional investors during the book building phase.
Design/methodology/approach
The authors decompose underwriters’ incremental knowledge acquisition into objective knowledge – acquired from premarket bids – and subjective knowledge – which is orthogonal to the objective knowledge. The authors implement a multiplicative heteroscedasticity model to analyze how each knowledge component relates to the level and volatility (as a proxy of pricing uncertainty) of post-issue returns. The authors take the 2007 regulatory change as a quasi-natural experiment in which institutional investors were incentivized to provide true information.
Findings
For Korean IPOs, the authors find that the objective (subjective) knowledge component reduces (increases) both pricing uncertainty and underpricing. The authors also observe that the efficacy of the IPO knowledge creation critically depends on the quality of the information provided by institutional investors, as anticipated by the KBV literature.
Originality/value
Using fine-grained knowledge measures, the authors provide original, compelling evidence that objective (subjective) knowledge formulated from the IPO knowledge-creation processes de facto alleviates (worsens) underwriters’ pricing difficulties. This reinforces the importance of knowledge-based mechanisms in managerial decision-making processes.
Keywords
Acknowledgements
The authors are grateful to Manlio Del Giudice (the editor), an associated editor, and two anonymous referees for their insightful comments. All errors and inaccuracies are our own.
Citation
Eom, C. and Kang, H.-G. (2022), "How does knowledge affect IPO pricing? A new approach grounded in the knowledge-based view", Journal of Knowledge Management, Vol. 26 No. 7, pp. 1849-1867. https://doi.org/10.1108/JKM-02-2021-0148
Publisher
:Emerald Publishing Limited
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