Partial Adjustment to Public Information in the Pricing of IPOs

41 Pages Posted: 15 Mar 2012 Last revised: 20 Sep 2016

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)

Date Written: September 10, 2016

Abstract

Extant literature shows that IPO first-day returns are correlated with market returns preceding the issue. We propose a rational explanation for this puzzling predictability by adding a public signal to Benveniste and Spindt (1989)'s information-based framework. A novel result of our model is that the compensation required by investors to truthfully reveal their information decreases with the public signal. This "incentive effect"' receives strong empirical support in a sample of 6,300 IPOs in 1983-2012. Controlling for the incentive effect, the positive relation between initial returns and pre-issue market returns disappears for top-tier underwriters, where the order book is held to be most informative, effectively resolving the predictability puzzle.

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

JEL Classification: G24, G32

Suggested Citation

Bakke, Einar and Leite, Tore E. and Thorburn, Karin S., Partial Adjustment to Public Information in the Pricing of IPOs (September 10, 2016). Journal of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2021802 or http://dx.doi.org/10.2139/ssrn.2021802

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

Norwegian School of Economics (NHH) ( email )

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

Karin S. Thorburn (Contact Author)

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)

77 Bastwick Street
London, EC1V 3PZ
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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