Why Do IPO Offer Prices Only Partially Adjust?

Abstract

This study develops a structural model of the IPO pricing process that enables the estimation of adjustment rates for public and private pricing information gathered during bookbuilding. The estimated upward adjustment rate of public information is only 21%, significantly less than the 28% rate of private information. Adjustment rates decline towards the IPO date, especially for upward adjustments. The findings contradict information acquisition theories that predict a complete adjustment to public information and highlight the inefficiency of the IPO bookbuilding mechanism in handling new information even when the information is publicly available and especially when it is favorable.

Keywords: Initial public offerings, Underpricing, Partial adjustment, Bookbuilding

JEL Classification: G24, G32, G14, C78