Early Price Discovery in IPOs

Abstract

IPO theory posits that underwriters reward investors for revealing private valuations, but empirical evidence drawn primarily from bookbuilding remains mixed. In practice, extensive interactions between underwriters and investors occur well before bookbuilding, but remain largely unobserved. We address this gap using novel data from the pre-bookbuilding phase of IPOs, where underwriter analysts conduct physical meetings with prospective investors to solicit their views on the issuer. Our data capture over 18,500 such meetings, recording each investor's disclosed valuations, assessments, and bidding intentions. To identify the causal effect of early engagement, we exploit new airline routes that shorten travel times between analysts and investors as an exogenous shock to meeting costs. We find that early feedback improves pricing precision, with a one standard deviation increase in feedback intensity narrowing the initial price range by 1.5 standard deviations. Far from cheap talk, early feedback credibly predicts subsequent investor behavior: those who disclose valuations early are more likely to bid, submit larger orders, and receive more generous and profitable allocations. Early feedback also has significant influence on the final offer price after accounting for demand realized during bookbuilding. These findings suggest that the Benveniste and Spindt (1989) information revelation mechanism operates prior to formal bookbuilding, establishing early investor engagement as a primary tool for price discovery in public offerings. 

Keywords: Initial Public Offerings, Price Discovery, Pre-Deal Investor Education, Bookbuilding, Information Revelation JEL Codes: D22

JEL Classification: D22, G14, G23, G24, G34