Are Share Price Levels Informative? Evidence from the Ownership, Pricing, Turnover, and Performance of IPO Firms

45 Pages Posted: 13 Oct 2003

See all articles by Chitru S. Fernando

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management

Paul A. Spindt

Tulane University - A.B. Freeman School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: September 2003

Abstract

Firms choose a share price level both when they split their seasoned shares and when they go public. The stock splits literature, which has examined whether this choice has any economic significance, remains divided on the question of whether firms split their shares to achieve a desired share price or to signal private information. In the market microstructure literature, the share price has been considered significant primarily as a proxy for market liquidity. Controlling for liquidity as well as size effects, we ask whether a firm's choice of IPO price is informative in the sense that it relates systematically to the firm's other choices and characteristics. We make several contributions to the literature. We first examine whether there are systematic differences in ownership structure (individual vs. institutional) between low and high-priced IPOs. We find that both institutional ownership and underwriter reputation increases monotonically with the chosen IPO price level. We next examine the relationship between price level and IPO underpricing, turnover and performance. We find that the relationship between IPO price level and under pricing is U-shaped. The U-shape is robust to controls for the Hanley (1993) partial adjustment phenomenon. In contrast, post-IPO turnover displays an inverted U-shaped relation to IPO price. Moreover, firms choosing a higher (lower) stock price level experience lower (higher) mortality rates. Our results remain unchanged when we confine our analysis to the sub-period following the 1990 Penny Stock Reform Act, when we control for the listing exchange, and when we specifically exclude penny stocks from our sample.

JEL Classification: G12, G14, G24, G32

Suggested Citation

Fernando, Chitru S. and Krishnamurthy, Srinivasan and Spindt, Paul A., Are Share Price Levels Informative? Evidence from the Ownership, Pricing, Turnover, and Performance of IPO Firms (September 2003). Available at SSRN: https://ssrn.com/abstract=452580 or http://dx.doi.org/10.2139/ssrn.452580

Chitru S. Fernando (Contact Author)

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

Srinivasan Krishnamurthy

North Carolina State University - Poole College of Management ( email )

Hillsborough Street
Raleigh, NC 27695-8614
United States

Paul A. Spindt

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5413 (Phone)

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