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5 years ago

* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

* I would like to thank Frank Dobbin, Christopher Marquis, Peter ...

Reconsidering Pricing:

Reconsidering Pricing: Institutional Complexity in Initial Public Offering Prices Initial Public Offering (IPO) prices exhibit high first-day returns contradicting neoclassical theory that economists term “underpricing.” IPOs are the initial listing of a private company’s shares on a public equity market and are priced in two stages, with such staged pricing representing a natural experiment testing both neoclassical and behavioral price models. Efficient Market Hypothesis (EMH) asserts that financial market prices reflect all known information. IPO second-stage returns (first-day returns) directly contradict EMH and neoclassical asset-price models, with economists attempting to account for second-stage returns by noting information asymmetries and employing behavioral theories. However, non-rational investor models from behavioral finance cannot explain IPO first-stage returns (pricing above the range). Despite over thirty years of research in financial economics, IPO “underpricing” remains an unresolved research question (Loughran and Ritter 2002; Ritter and Welch 2002). This study proposes that IPO first-stage return outcomes isolate issuer-side explanatory factors, with institutional logics explaining variation in pricing above the range. Modern price theory has ignored sociocultural logics. Neoclassical theory hypothesizes that market actors rationally update new information to maximize utility against resource constraints (Manski 2000; Dybvig and Ross 2003). For behavioral theories, systematic cognitive biases (non-Bayesian updating of information and nonrational preferences) cause divergence from neoclassical models (Hirshleifer 2001; Barberis and Thaler 2003). Both economic theory groups assert a universal sociocultural orientation (rationality or systematic cognitive biases, respectively), denying institutional complexity in logics. Similarly, sociologists examining prices have not focused on institutional logics but instead followed Granovetter’s lead in linking 2

economic action with social structure (1985, 2005), expanding the constraints important for price determination beyond pecuniary to social structural resources (e.g., Cook and Emerson 1978; Cook et al. 1983; Podolny 1993, 2001, 2005; Benjamin and Podolny 1999; Uzzi and Lancaster 2004). While the institutional logics literature has documented the persistence of multiple logics in the financial sector (Lounsbury 2007; Marquis and Lounsbury 2007), it has not applied these insights to price analysis. Noncompeting institutional logics encompassing different perceptions of what constitutes a company coexist in the private investment field. These differing perceptions of the ontological nature of companies lead strategic actors to exploit different methods of generating investment gains. As these investment organizations expand their scope of activities, they extend these logics to markets where the dominant institutional practices and norms may be detrimental to their interests. In such situations, the strategic actions conditioned by the perceptions of these coexisting investment logics may differ in resistance to these detrimental practices and norms. I study the two dominant institutional logics—Income and Growth—in the institutional private investment field comprised of the private equity and venture capital industries, and show how these logics influence IPO first-stage returns. Because Income investors perceive companies as bundles of cash streams, they develop methods to exploit these cash streams to generate investment gains. Private equity firms espousing such logic focus strictly on cash considerations when negotiating financial transactions. In contrast, Growth investors perceive companies as people turning ideas into paying customers, and accordingly develop methods to exploit collaboration to generate business growth resulting in investment gains. Private equity firms apply the beliefs and perceptions of these two differing investment logics to IPO pricing, with 3

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