Are Initial Return and IPO Discount the Same Thing? A Comparison of Direct Public Offerings and Underwritten IPOs

The major difference between this study and the literature is in the estimation of the true IPO discount. We point out that initial return consists of two parts: the true discount of the offer price as well as the market reaction on the listing. By comparing the true discounts in traditional underwritten IPOs and the emerging direct public offerings(DPOs), we find that DPOs have both lower initial returns and lower discounts than IPOs, furthermore, DPOs have positive market reaction(overreaction) while IPOs have negative market reaction(underreaction) in the first month. The reason for the smaller discount of DPOs is not due to underwriting mechanism or firm characteristics, but that DPOs investors have less information asymmetry problem than their counterpart in IPOs. However, the DPO investors may be overconfident on their private information, which leads to market overreaction in the first month. Key words: DPO, IPO discount, initial return, overconfidence, information asymmetry