Why Do IPO Offer Prices Only Partially Adjust?

Abstract:     
Existing studies document that initial public offering (IPO) offer price changes can be used to predict first-day returns. This study shows that when offer prices are adjusted upwards, less than 23% of publicly available information is reflected in the offer price adjustment, significantly lower than the 30% rate for private information. This result is inconsistent with the predictions of information revelation theories. In downward adjustments, the rates of adjustment are approximately 100% for all types of information, even after controlling for withdrawn deals. A cross-sectional analysis reveals that the bargaining power of the issuing firms vis-a-vis their underwriters is an important determinant of the adjustment rates, as hypothesized by Loughran and Ritter (2002) and Ljungqvist and Wilhelm (2003). I also demonstrate that the omission of withdrawn deals creates a bias that results in a predicted negative coefficient on lagged market returns in underpricing regressions even if offer prices are adjusted fully.

Number of Pages in PDF File: 61

Keywords: Initial public offerings, Partial adjustment, Underpricing

JEL Classification: G24, G32, G14, C78

working papers series