Mispricing in IPO Methods and the Predictive Ability of Investors' Interest for New Issues

41 Pages Posted: 31 Jan 2002

See all articles by Salim Chahine

Salim Chahine

American University of Beirut - Olayan School of Business

Date Written: April 2002

Abstract

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

Chahine, Salim, Mispricing in IPO Methods and the Predictive Ability of Investors' Interest for New Issues (April 2002). Available at SSRN: https://ssrn.com/abstract=297055 or http://dx.doi.org/10.2139/ssrn.297055

Salim Chahine (Contact Author)

American University of Beirut - Olayan School of Business ( email )

Bliss Street
Beirut 1107 2020
Lebanon
961-1-374-374 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
678
Abstract Views
3,223
rank
36,809
PlumX Metrics