IPO Offer Prices and Firm Performance
51 Pages Posted: 2 Dec 2009
Date Written: October 31, 2009
This paper explores the determinants of IPO prices and studies the relationship between price choice of firms going public and post-issue stock performance and firm characteristics. I find that IPO prices positively relate to median industry prices, underwriter reputation, and book-to-market ratio of the firm going public. I further show that raw and risk-adjusted stock returns of IPOs monotonically increase with the ratio of offer price to average industry price. The difference in returns between IPOs with the highest and lowest relative offer prices averages 9% during one year following the issuance, and exceeds 60% over five years. The group of IPOs with high relative prices does not exhibit any underperformance relative to matches at any horizon. I also document a positive relation between underpricing and relative offer prices. I further show that firms with high relative prices generate better earnings after going public. These firms have larger market betas around the IPO, and spend considerably more on investment during five years following the offering.
Keywords: IPOs, performance, offer prices
JEL Classification: G12
Suggested Citation: Suggested Citation