Mispricing in IPO Methods and the Predictive Ability of Investors' Interest for New Issues
41 Pages Posted: 31 Jan 2002
Date Written: April 2002
This paper investigates the relationship between underpricing and the investors' interest prior to and after the IPO day. The empirical study, conducted on 305 French issues, shows a first-day abnormal return of 17.13% and a significant mispricing over the three first trading days (a 3-day Cumulative Abnormal Return of 19.15%). Initial underpricing is positively related to the share demand-to-offer ratio in the pre-market period, and to trading volume (scaled by shares issued) in the aftermarket. Higher turnover for underpriced issues than overpriced issues, used as a proxy of divergence of opinion among investors, suggests that informed investors participate mainly in underpriced issues. Book-built issues have a lower underpricing, on median, but a higher variance level, than the auction-like and fixed-price offerings. Despite the high initial underpricing of some book-built issues, book-building procedure appears to better control the information gathering from investors participating in the offering, and to be a more efficient pricing system than the auction-like procedure.
Keywords: Underpricing, IPO procedure, Investors' interest, Trading Volume
JEL Classification: G24, G28, G3
Suggested Citation: Suggested Citation