Why are European Ipos so Rarely Priced Outside the Indicative Price Range?
Oxford Financial Research Center Working Paper No. 2003-FE-05
22 Pages Posted: 12 Mar 2003
Date Written: January 2003
In contrast to practice in the U.S., European IPOs are very rarely priced outside the indicative price range, and frequently are priced at its upper bound. We develop a model that provides a rationale for this seemingly inefficient pricing behavior. The model allows for the practice, observed in Europe but not in the U.S., whereby underwriters obtain information from investors prior to establishing the indicative price range. With this alternative staging of the information game, first studied by Benveniste and Spindt (1989), a commitment to not exceeding the upper bound is necessary to extract private information from investors. The model has important implications for empirical research based on European primary market data.
Keywords: Initial Public Offerings, bookbuilding, underpricing
JEL Classification: G32
Suggested Citation: Suggested Citation