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Offering price clusters and underpricing in the US primary market

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Author Info
Kevin C. H. Chiang
T. Harikumar
Abstract

This study extends the microstructure literature by examining the offering prices in the United States Initial Public Offering (IPO) market for the presence of clusters. It is found that the use of whole prices is more frequent in the IPO market than in secondary stock markets. Offering prices in the IPO market exhibit a dominant clustering at whole fives and tens (5s and 0s) that cannot be adequately explained by existing hypotheses. Unlike other studies on IPO underpricing, this study examines the impact of offering price clusters on the degree of underpricing. It is documented that whole-priced IPOs are underpriced more relative to fractional-priced IPOs. It is found that the negotiations hypothesis and the implicit collusion hypothesis are not adequate explanations and leave this puzzle to be resolved by future research.

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Article provided by Taylor and Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 11 (July)
Pages: 809-822
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Handle: RePEc:taf:apfiec:v:14:y:2004:i:11:p:809-822

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  2. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212. [Downloadable!] (restricted)
  3. Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July. [Downloadable!] (restricted)
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  6. Carter, Richard B & Manaster, Steven, 1990. " Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-67, September. [Downloadable!] (restricted)
  7. Ronald M. Giammarino, Tracy Lewis, 1988. "A Theory of Negotiated Equity Financing," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(3), pages 265-288. [Downloadable!] (restricted)
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  11. Grinblatt, Mark & Hwang, Chuan Yang, 1989. " Signalling and the Pricing of New Issues," Journal of Finance, American Finance Association, vol. 44(2), pages 393-420, June. [Downloadable!] (restricted)
  12. Randolph P. Beatty & Jay R. Ritter, . "Investment Banking, Reputation and the Underpricing of Initial Public Offerings," Rodney L. White Center for Financial Research Working Papers 2-85, Wharton School Rodney L. White Center for Financial Research.
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  13. Hanley, Kathleen Weiss & Kumar, A. Arun & Seguin, Paul J., 1993. "Price stabilization in the market for new issues," Journal of Financial Economics, Elsevier, vol. 34(2), pages 177-197, October. [Downloadable!] (restricted)
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