The Winner's Curse Model of Underpricing: A Critical Assessment

The underpricing of Initial Public Offerings (IPOs) on equity markets is a well documented phenomenon that has received both theoretical and empirical inquiry. The model which has received most attention in recent years is Rock's (1986) Winner's Curse model. The paper critically evaluates this model and shows that it rests on a number of conflicting assumptions and a form of analysis which is in contradiction with its core hypothesis, and, furthermore, produces propositions that are largely untestable. Thus, any existing empirical support for the model is open to doubt. The paper concludes that further exploration of the underpricing phenomenon is warranted.