Partial adjustment to public information in the pricing of IPOs

Einar Bakke, Tore E. Leite and Karin Thorburn ()

Journal of Financial Intermediation, 2017, vol. 32, issue C, 60-75

Abstract: Extant literature shows that IPO first-day returns are correlated with market returns preceding the issue. We propose a rational explanation for this puzzling predictability by adding a public signal to Benveniste and Spindt (1989)’s information-based framework. A novel result of our model is that the compensation required by investors to truthfully reveal their information decreases with the public signal. This “incentive effect” receives strong empirical support in a sample of 6300 IPOs in 1983–2012. Controlling for the incentive effect, the positive relation between initial returns and pre-issue market returns disappears for top-tier underwriters, where the order book is held to be most informative, effectively resolving the predictability puzzle.

Keywords: IPO; Underpricing; Bookbuilding; Public information; Private information; Partial adjustment (search for similar items in EconPapers)
JEL-codes: G24 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:32:y:2017:i:c:p:60-75

DOI: 10.1016/j.jfi.2016.09.003

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