Skip to main content

Royal Mail Underpriced?

A National Audit Office report released today has criticized the UK government for selling shares in Royal Mail too cheaply. Some estimates suggest that the UK taxpayer could have obtained £1 billion more in the privatisation. 

The underpricing of Initial Public Offerings (IPO) is a well-known phenomenon in financial economics, with the average IPO making a first-day return of 10% (see Jay Ritter's homepage). However, the first-day return on the Royal Mail IPO was 38% - the company was sold too cheaply by the government. The question is: why did they do this? Was it simply incompetence? Were the investment banks behind the issue lining their pockets and those of their clients?

Popular posts from this blog

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press . 

The Great Depression

Marginal Revolution University has a great video on the Great Depression.