Securities litigation, withdrawal risk and initial public offerings

Abstract

I examine the relations between litigation risk, withdrawal risk, and the costs of going public using a sample of withdrawn and completed initial public offerings (IPOs) filed during 1996-2005. Firms with a higher probability of offer withdrawal face higher litigation risk if they complete these offers. Firms with higher litigation risk pay slightly higher gross spreads, but do not underprice their IPOs by a greater amount. Withdrawal probability is strongly and positively associated with underwriter gross spreads, consistent with underwriters charging fees that reflect the probability of not getting paid. When the pre-market demand for an IPO is weak, a higher withdrawal probability raises underpricing on completed deals.IPO Litigation risk Withdrawal risk IPO failure Underpricing Underwriter gross spread