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

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