Two-stage Partial Adjustments: Evidence from Refiling Behavior in the IPO Pricing Process

This study develops a structural model of the initial public offering (IPO) pricing process that enables the estimation of adjustment rates for public and private pricing information gathered during bookbuilding. The estimated upward adjustment rate of public information is only 21%, significantly less than the 28% rate of private information. Adjustment rates decline towards the IPO date, especially for upward adjustments. The findings contradict information acquisition theories that predict a complete adjustment to public information and highlight the inefficiency of the IPO bookbuilding mechanism in handling new information even when information is publicly available and especially when it is favorable.

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Review of IPO Primary Market Pricing Literature

Accounting and Finance Research ◽

10.5430/afr.v9n4p32 ◽

2020 ◽

Vol 9 (4) ◽

pp. 32

Author(s):

Sabrina Severini

Keyword(s):

Initial Public Offering ◽

Market Price ◽

Secondary Market ◽

Investment Banks ◽

Market Pricing ◽

Pricing Process ◽

Ipo Pricing ◽

Public Offering ◽

Key Participants ◽

The Way

The aim of this paper is to offer a comprehensive review of Initial Public Offering literature on the pricing and interactions that occur in the IPO primary market. Among the multitude of variables that might affect the way shares are priced and sold in new offerings, the role of previous relationships between issuing firms, investment banks, and institutional investors, i.e. key participants in the listing process, is the object of analysis in the present paper. Existing mixed evidence suggests that repeated interactions among the major players could influence the IPO results in two ways: either by reducing asymmetric information problems or by determining opportunistic behaviours which can be seen in well-known secondary market price anomalies. The originality of the paper lies in the fact that it is the first to provide a review of literature on IPO primary market dynamics, thereby highlighting the way in which relationships between key parties of an IPO shape the entire pricing process. Moreover, this study points out the importance of shifting attention to this market in order to better understand IPO pricing dynamics.

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