Negotiation and the IPO Offer Price: A Comparison of Integer Versus Non-Integer Ipos

Journal Financial and Quantitative Analysis, Vol. 39, No. 3, 517-540

33 Pages Posted: 24 Mar 2002 Last revised: 25 Apr 2019

See all articles by Daniel Bradley

Daniel Bradley

University of South Florida

John Cooney

Texas Tech University - Rawls College of Business

Bradford D. Jordan

University of Florida; University of Florida - Department of Finance, Insurance and Real Estate

Ajai K. Singh

Department of Finance, University of Central Florida

Date Written: March 11, 2002

Abstract

We investigate the pricing of 4,523 initial public offerings of common stock with offer dates between 1981 and 2000. Our study documents that approximately three-fourths of IPOs have integer offer prices. Average initial returns for IPOs with integer offer prices are significantly higher (25.5 percent) than those priced on the fraction of the dollar (8.1 percent). Higher initial returns for integer offerings are observed for 18 of the 20 years of our study and over various ranges of offer prices. Initial returns for integer and fractional IPOs are similar for the subsample of offerings priced below the original filing range. However, significant differences are found for IPOs priced within and above the filing range. For instance, the average initial return for integer offerings priced above the filing range is 65.5 percent compared to 19.9 percent for those priced on the fraction of the dollar.

Similar to the arguments made by Harris (1991), we hypothesize that integer versus fractional dollar IPOs are the result of negotiations between the issuing firm and underwriter. Under the negotiation hypothesis, the frequency of integer pricing should be a positive function of the offer price and uncertainty. With greater uncertainty, the extent of underpricing for integer offerings should be higher than for fractional offerings as the investment bank seeks to manage its underwriting risk.

We present evidence supportive of the negotiation hypothesis. Specifically, we observe that the frequency of integer prices for the sample of IPOs priced at $15 and above is about twenty percentage points higher than for those IPOs priced below $10 per share. We also document that both the cross-sectional standard deviation of initial returns and the ex-post standard deviation of daily stock returns is highest for offerings priced on the dollar. This higher level of uncertainty for integer offerings is consistent with their high degree of underpricing.

Keywords: IPOs, Offer Price, Rounding, IPO Initial Returns, Negotiation

JEL Classification: G24, G32

Suggested Citation

Bradley, Daniel and Cooney, John W. and Jordan, Bradford D. and Singh, Ajai K., Negotiation and the IPO Offer Price: A Comparison of Integer Versus Non-Integer Ipos (March 11, 2002). Journal Financial and Quantitative Analysis, Vol. 39, No. 3, 517-540, Available at SSRN: https://ssrn.com/abstract=304964 or http://dx.doi.org/10.2139/ssrn.304964

Daniel Bradley

University of South Florida ( email )

Tampa, FL 33620
United States

John W. Cooney (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States
806-834-1536 (Phone)

Bradford D. Jordan

University of Florida ( email )

Gainesville, FL 32611
United States

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

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