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Issuer Operating Performance and IPO Price Formation

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  • MICHAEL WILLENBORG
  • BIYU WU
  • YANHUA SUNNY YANG

Abstract

We study the relation between issuer operating performance and initial public offering (IPO) price formation from the initial price range to the offer price to the closing price on the first trading day. For a post‐bubble sample of 2001–2013 IPOs, we find that pre‐IPO net income and, in particular, operating cash flow are strongly, positively associated with the revision from the mid‐point of the initial price range to the offer price and that the “partial adjustment phenomenon” concentrates among issuers with the strongest operating performance. As for why publicly observable information helps predict changes in valuation from when the initial price range is set to when the offer price is set, our findings suggest that strong‐performing issuers, especially those offering small slices of ownership, have lower bargaining incentives and are susceptible to the underwriter(s) low‐balling the price range. Overall, our results suggest an important role for accounting information in understanding the pricing of book‐built IPOs and are consistent with the presence of agency problems between issuers and underwriters.

Suggested Citation

  • Michael Willenborg & Biyu Wu & Yanhua Sunny Yang, 2015. "Issuer Operating Performance and IPO Price Formation," Journal of Accounting Research, Wiley Blackwell, vol. 53(5), pages 1109-1149, December.
    • Handle: RePEc:bla:joares:v:53:y:2015:i:5:p:1109-1149
    DOI: 10.1111/1475-679X.12091
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    Cited by:

    1. Ajay Yadav & Jaya Mamta Prosad & Sumanjeet Singh, 2023. "Pre-IPO Financial Performance and Offer Price Estimation: Evidence from India," JRFM, MDPI, vol. 16(2), pages 1-19, February.
    2. Denis Cormier & Daniel Coulombe & Luania Gomez Gutierrez & Bruce J. Mcconomy, 2018. "Firms in Transition: A Review of the Venture Capital, IPO, and M&A Literature," Accounting Perspectives, John Wiley & Sons, vol. 17(1), pages 9-88, March.
    3. Liu, Laura Xiaolei & Lu, Ruichang & Sherman, Ann E. & Zhang, Yong, 2023. "IPO underpricing and limited attention: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 154(C).
    4. Xiaotao (Kelvin) Liu & Biyu Wu, 2021. "Do IPO Firms Misclassify Expenses? Implications for IPO Price Formation and Post-IPO Stock Performance," Management Science, INFORMS, vol. 67(7), pages 4505-4531, July.
    5. McGuinness, Paul B., 2016. "Voluntary profit forecast disclosures, IPO pricing revisions and after-market earnings drift," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 70-83.
    6. Nancy L. Harp & Kevin H. Kim & Derek K. Oler, 2021. "A bold move or biting off more than they can chew: examining the performance of small acquirers," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 393-422, February.
    7. Wang, Wei & Yung, Chris, 2021. "IPO quantity revisions," Journal of Banking & Finance, Elsevier, vol. 132(C).
    8. Mary Brooke Billings & Kevin Hsueh & Melissa F. Lewis-Western & Gladriel Shobe, 2023. "Innovations in IPO Deal Structure: Do Up-C IPOs Harm Public Shareholders?," Management Science, INFORMS, vol. 69(5), pages 3048-3079, May.
    9. Joseph R. Rakestraw & Raman Kumar & John J. Maher, 2020. "Industry-Average Earnings Management and IPO Pricing," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(04), pages 1-46, January.
    10. He, Liyu & Hsin-han Shen, Carl & Shiu, Cheng-Yi, 2022. "Is fair value information fairly priced? Evidence from IPOs in global capital markets✰," Journal of Banking & Finance, Elsevier, vol. 135(C).
    11. Panos N. Patatoukas & Richard G. Sloan & Annika Yu Wang, 2022. "Valuation Uncertainty and Short-Sales Constraints: Evidence from the IPO Aftermarket," Management Science, INFORMS, vol. 68(1), pages 608-634, January.
    12. Salim Chahine & Gonul Colak & Iftekhar Hasan & Mohamad Mazboudi, 2020. "Investor relations and IPO performance," Review of Accounting Studies, Springer, vol. 25(2), pages 474-512, June.
    13. Chan, Kam C. & He, Jie & Li, Changwei & Zhang, Linlang, 2023. "Narcissistic managers and IPO underpricing," International Review of Financial Analysis, Elsevier, vol. 89(C).

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