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

47 Pages Posted: 5 Jun 2002

See all articles by Kevin C.H. Chiang

Kevin C.H. Chiang

University of Alaska Fairbanks - School of Management (SOM); Louisiana State University, Baton Rouge - Department of Finance

T. Harikumar

University of Alaska at Fairbanks

Date Written: March 29, 2002

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.

Suggested Citation

Chiang, Kevin C.H. and Harikumar, T., Information Production and IPO Offering Price Clusters: Further Evidence Explaining Underpricing and Long-Run Underperformance (March 29, 2002). Available at SSRN: https://ssrn.com/abstract=312668 or http://dx.doi.org/10.2139/ssrn.312668

Kevin C.H. Chiang (Contact Author)

University of Alaska Fairbanks - School of Management (SOM) ( email )

P.O. Box 756080
208C Bunnell Building
Fairbanks, AK 99775-0500
United States
907-474-7049 (Phone)
907-474-5219 (Fax)

Louisiana State University, Baton Rouge - Department of Finance ( email )

E.J. Ourso College of Business Administration
Baton Rouge, LA 70803
United States
225-753-4978 (Phone)
225-388-6366 (Fax)

T. Harikumar

University of Alaska at Fairbanks

Fairbanks, AK 99775-6660
United States

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