Information Production and IPO Offering Price Clusters: Further Evidence Explaining Underpricing and Long-Run Underperformance

Abstract

We propose a new informational role for the offering price of an equity IPO. Offering prices are quoted either in whole prices (e.g., $2, $11, $19, etc) or fractional prices (e.g., $2.35, $11.15, $15.75, etc). Using Jay R. Ritter's sample of 1,526 IPOs issued during the period 1975 to 1984, we find the presence of offering price clusters around whole prices. Using the same sample, we examine the relation between these clusters, initial underpricing and long-run underperformance. The results indicate that fractional offering prices are associated with lower initial underpricing and better long-run performance. Our tests indicate that offering price clusters serve as a proxy for the quality of information produced by underwriters.