Issuer Operating Performance and IPO Price Formation

Posted: 4 Mar 2016

See all articles by Michael Willenborg

Michael Willenborg

University of Connecticut - Department of Accounting

Biyu Wu

University of Nebraska at Lincoln - School of Accountancy

Yanhua Sunny Sunny Yang

University of Connecticut - School of Business; University of Connecticut - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2015

Abstract

We study the relation between issuer operating performance and IPO price formation, from the initial price range to the offer price to the closing price on the first trading day. For a post-bubble sample of 2001-2013 IPOs, we find that pre-IPO net income and, in particular, operating cash flow are strongly, positively associated with the revision from the midpoint of the initial price range to the offer price and that the ‘partial adjustment phenomenon’ concentrates among issuers with the strongest operating performance. As for why publicly observable information helps predict changes in valuation from when the initial price range is set to when the offer price is set, our findings suggest that strong-performing issuers, especially those offering small slices of ownership, have lower bargaining incentives and are susceptible to the underwriter(s) low-balling the price range. Overall, our results suggest an important role for accounting information in understanding the pricing of book-built IPOs and are consistent with the presence of agency problems between issuers and underwriters.

Keywords: Operating performance, initial public offerings, partial adjustment, underpricing

JEL Classification: G24, G32, M13, M41

Suggested Citation

Willenborg, Michael and Wu, Biyu and Yang, Yanhua Sunny, Issuer Operating Performance and IPO Price Formation (December 1, 2015). Journal of Accounting Research, Vol. 43, No. 5, 2015. Available at SSRN: https://ssrn.com/abstract=2741277

Michael Willenborg (Contact Author)

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269
United States
860-486-3020 (Phone)
860-486-4838 (Fax)

Biyu Wu

University of Nebraska at Lincoln - School of Accountancy ( email )

Lincoln, NE 68588
United States

Yanhua Sunny Yang

University of Connecticut - School of Business ( email )

2100 Hillside Road
Storrs, CT 06269-1041
United States
8604864696 (Phone)
8604864838 (Fax)

HOME PAGE: http://www.business.uconn.edu/person/yanhua-sunny-yang/

University of Connecticut - School of Business ( email )

2100 Hillside Rd, Unti 1041A
Storrs, CT 06238
United States
8604864696 (Phone)

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