valuable in mitigating investors' ex ante uncertainty about the true' value of an offering, thereby reducing the subsequent level of underpricing achieved by that firm This paper is structured as follows. Section 2 discusses background literature with a focus on the theoretical models that have been developed in a US setting to explain underpricing. There is also consideration given to the direction that underpricing research has taken in an Australian etting. Section 3 is concerned with the development of hypotheses. Sample selection empirical design and the definition and measurement of explanatory variables used to test the hypotheses is considered in Section 4. Section 5 presents the empirical findings Concluding remarks are offered in Section 6 2. REVIEW OF PRIOR LITERATURE 2.1 General background An IPO is the first effort by private firms to raise capital in the public equity market. Many empirical studies have documented that IPOs are typically underpriced, that is, an investor who purchases new issues at the offering price can, on average, make relatively large returns Loughran and Ritter(2000)report that for the period 1990 to 1998, IPO candidates left over US$27 billion of potential IPO proceeds on the table' because of underpricing. For the same period, the first day returns of IPOs averaged approximately 15 per cent, indicating there is a systematic downward bias in the offer price compared with the price in the secondary trading market. However, recent years have witnessed unprecedented levels of underpricing driven largely by the spectacular stock exchange debuts achieved by firms with Internet-focused business models. Ritter(2001)reports that uS$65 billion was left on the table from all IPOs during 1999 and 2000 alone. Further, DuCharme et al. (2001)document that the mean(median) underpricing of 238 Internet IPOs listed in the US during the period 1988 through 1999 was a staggering 113. 8 per cent (45.6 per cent) Various theoretical models have been developed to explain underpricing as an equilibrium phenomenon in the IPO market. These include models based on the institutional framework hypothesis( Chalk and Peavy 1986, Finn and Higham 1988, and Taylor and Walter 1990), the litigation hypothesis(Tinic 1988), and the information asymmetry hypothesis, which includes consideration of reputation effects for auditors and underwriters of new issues(Titman and Trueman 1986, Beatty 1989, and Balvers, McDonald and Miller 1988)and the signalling telecommunications, information technology, electronics, multimedia, the Internet, or biotechnology Ibbotson and ritter(1993), How(1994)and Loughran et al. (1994)summarise international evidence of IPO underpricing, as well as potential determinants thereof.4 valuable in mitigating investors’ ex ante uncertainty about the ‘true’ value of an offering, thereby reducing the subsequent level of underpricing achieved by that firm. This paper is structured as follows. Section 2 discusses background literature with a focus on the theoretical models that have been developed in a US setting to explain underpricing. There is also consideration given to the direction that underpricing research has taken in an Australian setting. Section 3 is concerned with the development of hypotheses. Sample selection, empirical design and the definition and measurement of explanatory variables used to test the hypotheses is considered in Section 4. Section 5 presents the empirical findings. Concluding remarks are offered in Section 6. 2. REVIEW OF PRIOR LITERATURE 2.1 General Background An IPO is the first effort by private firms to raise capital in the public equity market. Many empirical studies have documented that IPOs are typically underpriced, that is, an investor who purchases new issues at the offering price can, on average, make relatively large returns 3 . Loughran and Ritter (2000) report that for the period 1990 to 1998, IPO candidates left over US$27 billion of potential IPO proceeds ‘on the table’ because of underpricing. For the same period, the first day returns of IPOs averaged approximately 15 per cent, indicating there is a systematic downward bias in the offer price compared with the price in the secondary trading market. However, recent years have witnessed unprecedented levels of underpricing driven largely by the spectacular stock exchange debuts achieved by firms with Internet-focused business models. Ritter (2001) reports that US$65 billion was left on the table from all IPOs during 1999 and 2000 alone. Further, DuCharme et al. (2001) document that the mean (median) underpricing of 238 Internet IPOs listed in the US during the period 1988 through 1999 was a staggering 113.8 per cent (45.6 per cent). Various theoretical models have been developed to explain underpricing as an equilibrium phenomenon in the IPO market. These include models based on the institutional framework hypothesis (Chalk and Peavy 1986, Finn and Higham 1988, and Taylor and Walter 1990), the litigation hypothesis (Tinic 1988), and the information asymmetry hypothesis, which includes consideration of reputation effects for auditors and underwriters of new issues (Titman and Trueman 1986, Beatty 1989, and Balvers, McDonald and Miller 1988) and the signalling telecommunications, information technology, electronics, multimedia, the Internet, or biotechnology. 3 Ibbotson and Ritter (1993), How (1994) and Loughran et al. (1994) summarise international evidence of IPO underpricing, as well as potential determinants thereof