The Role of Investment Bankers in IPO Underpricing: Case Study of Airbnb's 2020 IPO

ABSTRACT: This study examines how investment bankers influence the underpricing of initial public offerings (IPOs), using Airbnb's 2020 IPO as a case study. IPO underpricing, which is when the closing price on the first day of trading is much higher than the initial offer price, is a common occurrence worldwide, affecting companies, investors, and financial markets. During the COVID-19 pandemic, many IPOs saw unusually high returns on their first day of trading; for example, Airbnb's shares more than doubled in value, indicating significant underpricing. Empirical observations indicate that reputable underwriters and robust financial intermediaries can exacerbate underpricing during periods of economic instability, thereby mirroring strategic pricing methodologies and investor demand fluctuations. Analyzing Airbnb's initial public offering data, which encompasses the $68 offer price and the first-day closing price of approximately $145, this study computes underpricing and investigates the influence of lead investment banks on price determination, book building processes, and allocation strategies. The results demonstrate that underwriters, by reconciling the interests of issuers with those of investors, can generate substantial capital losses for companies. Consequently, this research enhances investment theory by correlating underwriter motivations with pricing results, while also providing actionable recommendations for corporations, investors, and regulatory bodies regarding the refinement of IPO pricing approaches.