TITLE
"Capacity Constraints and IPO Underpricing in the Property and Liability Insurance Industry," Journal of Insurance Issues, Tong Yu, Bingxuan Lin, Mulong Wang, and William R. Feldhaus, Fall 2004, Vol. 27, No. 2, pp. 104-122. Full-text articles soon will be available through ABI/INFORM and EBSCO; click here for article PDF.

ABSTRACT
We analyze the impact of capacity constraints on IPO underpricing in the US property and liability (P&L) insurance industry. Our results show that insurer IPOs experience much less underpricing when insurers go public during capacity-constrained periods. Monte Carlo simulation shows that IPOs in other industries do not exhibit similar traits, suggesting our findings are specific to the P&L insurance industry. In addition, our regression analyses confirm that IPO underpricing is negatively associated with P&L insurance industry capacity measures. Going public provides P&L insurers with better access to the capital market, thus alleviating the constraint on their capacity to provide insurance coverage. However, going public after capital shocks may not be ideal for firms whose performance is adversely affected by shocks due to higher IPO costs and stricter disclosure requirements. IPOs during capacity-constrained periods are less underpriced since capacity constraints assist in screening out poor performers.

[Key words: IPO, underpricings, information asymmetry, quality screening]