Do Underwriters Price-Up IPOs to Prevent Withdrawal?
Journal of Financial and Quantitative Analysis, Forthcoming
54 Pages Posted: 29 Jun 2017 Last revised: 10 Jun 2020
Date Written: April 1, 2019
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: Suggested Citation