The underpricing of the UK privatization IPOs is explained
from Rock's winner's curse perspective. The initial abnormal
return achieved by 41 privatization IPOs in the UK is 38.42%,
which is substantially greater than for non-privatization IPOs
and justified as a way of creating wider share ownership.
Underpricing of privatization issues minimizes potential capital
losses for uninformed investors. On this scale although it
involves oversubscription and allocation constraint which while
favouring uninformed investors involve substantial costs.
Nevertheless uninformed investors obtain returns covering the
risk-free rate of return. This finding is consistent with the main
implication of Rock's model.