Do Underwriters Price-Up IPOs to Prevent Withdrawal?

Journal of Financial and Quantitative Analysis, Forthcoming

54 Pages Posted: 29 Jun 2017 Last revised: 8 May 2019

See all articles by Walid Y. Busaba

Walid Y. Busaba

University of Western Ontario - Ivey Business School

Zheng Liu

University of Western Ontario - Richard Ivey School of Business

Felipe Restrepo

University of Western Ontario - Richard Ivey School of Business

Date Written: April 1, 2019

Abstract

We examine whether underwriters price-up weakly-demanded IPOs to prevent withdrawal. Our empirical strategy exploits a discontinuity in the distribution of IPO prices around the low boundary of the filing range. Offerings with a high ex-ante withdrawal probability that are priced at this boundary are likely priced-up to meet issuers’ reservation prices. We compare the aftermarket returns of these IPOs to the returns of other weakly-demanded offerings where issuers’ reservation prices were likely not binding, and identify a negative 8.4-percentage point differential attributable to the aggressive pricing inherent in setting the price at the low boundary when withdrawal risk is high.

Keywords: Initial Public Offerings, Withdrawals, Selective Overpricing, Bookbuilding, Reservation Price

JEL Classification: G14, G24, G32

Suggested Citation

Busaba, Walid Y. and Liu, Zheng and Restrepo, Felipe, Do Underwriters Price-Up IPOs to Prevent Withdrawal? (April 1, 2019). Journal of Financial and Quantitative Analysis, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2993618 or http://dx.doi.org/10.2139/ssrn.2993618

Walid Y. Busaba

University of Western Ontario - Ivey Business School ( email )

1255 Western RoD
London, Ontario N6G 0N1
Canada
519-661-4178 (Phone)
519-661-4184 (Fax)

HOME PAGE: http://www.ivey.uwo.ca/faculty/directory/walid-busaba/

Zheng Liu

University of Western Ontario - Richard Ivey School of Business ( email )

London, Ontario N6A 5B8
Canada

Felipe Restrepo (Contact Author)

University of Western Ontario - Richard Ivey School of Business ( email )

1255 Western Road
London, Ontario N6G 0N1
Canada

HOME PAGE: http://www.ivey.uwo.ca/faculty/directory/felipe-restrepo/

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