Public Information and IPO Initial Returns: Theory and Tests

42 Pages Posted: 18 Mar 2011 Last revised: 10 May 2015

See all articles by Einar Bakke

Einar Bakke

Norwegian School of Economics (NHH); Centre For Finance

Tore E. Leite

Norwegian School of Economics (NHH)

Karin S. Thorburn

Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: May 10, 2015

Abstract

The literature shows that the first-day return in an IPO is positively related to the market return leading up to the issue. We propose a new model for this puzzling predictability by adding a public signal to the Benveniste and Spindt (1989) information-based framework. The public signal affects the equilibrium offer price through investors' incentives to truthfully reveal their private information to the underwriter and the probability that the IPO is in high demand. Analyzing 6,300 U.S. IPOs in 1983-2012, the model predictions receive strong support in the subsample of top-tier underwriters, where the order book has been shown to be informative. Moreover, controlling for the incentive effect of the model, the positive relation between the initial return and the market return disappears, effectively resolving the predictability puzzle.

Keywords: IPO, underpricing, bookbuilding, public information, private information, partial adjustment

JEL Classification: G10, G32

Suggested Citation

Bakke, Einar and Leite, Tore E. and Thorburn, Karin S., Public Information and IPO Initial Returns: Theory and Tests (May 10, 2015). Available at SSRN: https://ssrn.com/abstract=1786342 or http://dx.doi.org/10.2139/ssrn.1786342

Einar Bakke

Norwegian School of Economics (NHH) ( email )

Helleveien 30
N-5045 Bergen
Norway
+4793423808 (Phone)

Centre For Finance ( email )

Box 640
Gothenburg, 403 50
Sweden

HOME PAGE: http://www.cff.handels.gu.se/

Tore E. Leite (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
N-5045 Bergen
Norway
+47 5595 9343 (Phone)
+47 5595 9841 (Fax)

Karin S. Thorburn

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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