Price Discovery from Offer Price to Opening Price of Initial Public Offerings

50 Pages Posted: 7 Jul 2021 Last revised: 8 Jul 2021

See all articles by Reena Aggarwal

Reena Aggarwal

Georgetown University - Robert Emmett McDonough School of Business ; European Corporate Governance Institute (ECGI)

Yanbin Wu

Emory University - Goizueta Business School

Date Written: June 1, 2021

Abstract

We examine the price discovery process of initial public offerings (IPOs) from the offer price to the first day’s open price. Stock exchanges have made major changes to the IPO preopening process, and introduced an open auction process in which all investors are able to enter orders and participate in price discovery. The time spent in preopening has increased for IPOs over the years, with an average of 77.23 minutes in 2020. The same pattern is not found for special purpose acquisition (SPAC) offerings. The percentage of the day’s volume executed in the IPO Cross is much higher, at 15.3%, than the approximately 1% for non-IPO stocks. Each phase of preopening contributes to incremental price discovery, with almost all of the price adjustment occurring during preopening. However, for “cold” IPOs, half of the price adjustment takes place after the market opens. Even though participation by retail investors has increased during preopening, their role in price discovery is limited. Our results suggest that institutional investors use the IPO Cross to sell shares. We also find that underwriters take advantage of changes implemented after the Facebook IPO that gave them a bigger role in deciding when to release an IPO for trading.

Keywords: Initial Public Offerings, SPACs, Retail Investors, Price Discovery, Opening Cross, Auction

JEL Classification: G14, G23, G24, G28

Suggested Citation

Aggarwal, Reena and Wu, Yanbin, Price Discovery from Offer Price to Opening Price of Initial Public Offerings (June 1, 2021). Available at SSRN: https://ssrn.com/abstract=3874314 or http://dx.doi.org/10.2139/ssrn.3874314

Reena Aggarwal (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-3784 (Phone)
202-687-0798 (Fax)

HOME PAGE: http://https://gufaculty360.georgetown.edu/s/contact/00336000014RhE9AAK/reena-aggarwal

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Yanbin Wu

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
108
Abstract Views
582
rank
309,904
PlumX Metrics