The '7% Solution' and IPO (Under)Pricing

60 Pages Posted: 8 Jul 2020 Last revised: 27 Sep 2021

See all articles by Walid Y. Busaba

Walid Y. Busaba

University of Western Ontario - Ivey Business School

Felipe Restrepo

University of Western Ontario - Richard Ivey School of Business

Date Written: June 8, 2021

Abstract

We investigate the effect of the “7% solution”—the fact that underwriters in the U.S. charge a 7% spread to most IPOs between $20 million and $100 million in size—on the ensuing pricing of the offerings. Our identification exploits the variation in spreads that is due to distinct kinks in the relation between spread and offer size at these two thresholds. We find that the spread positively influences underpricing but also the offer-price adjustment from the filing range’s midpoint. Our evidence indicates that the spread influences the aftermarket price, suggesting that underwriters can shape, not merely discover, investor valuations.

Keywords: Initial Public Offerings; IPO Spreads; Underpricing; Regression Kink Design (RKD)

JEL Classification: G14, G24, G32

Suggested Citation

Busaba, Walid Y. and Restrepo, Felipe, The '7% Solution' and IPO (Under)Pricing (June 8, 2021). Journal of Financial Economics: https://doi.org/10.1016/j.jfineco.2021.06.041., Available at SSRN: https://ssrn.com/abstract=3623433 or http://dx.doi.org/10.2139/ssrn.3623433

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/

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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