Issuer Surplus and the Partial Adjustment of IPO Prices To Public Information

51 Pages Posted: 14 Dec 2003

See all articles by Roger M. Edelen

Roger M. Edelen

Virginia Tech

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business

Date Written: March 4, 2003

Abstract

This study develops and tests a theoretical rationale for the well-documented fact that IPO prices are revised only partially in response to waiting-period market returns. Rational issuers maximize the expected surplus from going public by weighing the probability of deal success against offer proceeds conditional on success. A rise in market valuations during the waiting period increases surplus, causing the issuer to seek a higher success probability. This is achieved by only partially revising the offer price. In addition to explaining other stylized facts; including unconditional underpricing and hot issues markets, several predictions of the model are born out in new empirical tests. For example, the predicted relation between withdrawal probability and waiting-period market returns leads to a sample truncation bias in empirical analyses of IPO pricing. When that bias is taken into account, the often-cited asymmetric response of offer prices to up versus down market returns disappears.

Suggested Citation

Edelen, Roger M. and Kadlec, Gregory B., Issuer Surplus and the Partial Adjustment of IPO Prices To Public Information (March 4, 2003). AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=479542 or http://dx.doi.org/10.2139/ssrn.479542

Roger M. Edelen (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

Gregory B. Kadlec

Virginia Polytechnic Institute & State University - Pamplin College of Business ( email )

1016 Pamplin Hall
Blacksburg, VA 24061
United States
540-231-4316 (Phone)

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