Tie-in agreements and first-day trading in initial public offerings Hsuan-Chi Chen, Robin K. Chou, and Grace C.H. Kuan 2006 NTUConference Discussed by Yanzhi Wang

Summary This paper examines the underpricing during internet bubble by laddering. They firstly compute the laddering likelihood that is interpreted by matched industrial sector and pretax income. Then, they find that laddering likelihood is positively related to the magnitude of underpricing, number of trading and order imbalance. Different from previous IPO papers accounting for the IPO underpricing during internet bubble period (e.g, Loughran and Ritter (2002)), they provide an alternative point of view to interpret this puzzle.

Comments - the probit model This paper mentions that the loose listing standards in Nasdaq give access for unprofitable firms to go public during the internet bubble period. Based on the rule, they suggest the unprofitable firms being easier to be the laddering manipulation targets. So, the authors might consider to put the dummy whether a firm is traded in Nasdaq in the probit model. Probably it may match the argument in the paper more.

Comments - ex post or ex ante The authors suggest the laddering to be positive associated with the underpricing. I ’ m thinking the ex post and ex ante aspects in this issue. Let ’ s consider the following case: Realized laddering Predicted laddering by P(y=1)>0.5 or P(y=1)>% of ture laddering

Comments - ex post or ex ante The predicted side is the ex ante point of view, that is IPOs that are more likely to be laddering targets generate more interests and net buying. The actual laddering is the ex post point of view, which says that first-day price increases just in terms of the over- allotment. LadderingNo laddering Predicted laddering Higher underpricing here? Predicted not to laddering Or higher underpricing here?

Comments - prospect theory Loughran and Ritter (2002) explain the underpricing during internet bubble by prospect theory, i.e., the more share held by managers, the more underpricing the IPO has. Hence, the authors may consider this factor into the regression analyses. For example, put the ownership of the insiders into the regression. In my opinion, it may strengthen the result in this paper.