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IPO Price Clustering and Discreetness

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Author Info
Duke Bristow (Anderson School of Management)
Abstract

Price clustering in initial public offerings (IPOs) is extreme, pervasive, and long-lived. In a 25 year sample of 7,805 IPOs, offering prices range form one tenth cent to $5,000 per share. However, the price frequency distribution yields a clear triple peak with three discrete values, $5, 10, and $15 per share, accounting for 21.5% of all IPO prices. Clustering pervades every one of the top 20 two-digit SIC code groupings and every year from 1970 through 1994. Firms, underwriters and investors appear to have such consistent preferences for certain nominal prices per share that the mean IPO price per share dropped by 67.7% in real terms during the 25 year period. Additionally, the median IPO price has lagged inflation; it was $10 per share in 1994 as it was in 1990, 1989, 1983, 1977, 1973, 1972, and 1971. Two-day returns are 147 basis points (13%) higher for IPOs priced at $10 per share than otherwise similar firms. These results may indicate that underwriters choose the more highly-rounded prices to signal less precise valuations and that shareholders may earn higher returns for greater uncertainty. These findings build on Harris (1991) concerning clustering in seasoned stocks.

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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1107.

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Date of creation: 01 Feb 1998
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Handle: RePEc:cdl:anderf:1107

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  1. Brennan, Michael J. & Copeland, Thomas E., 1988. "Stock splits, stock prices, and transaction costs," Journal of Financial Economics, Elsevier, vol. 22(1), pages 83-101, October. [Downloadable!] (restricted)
  2. Grinblatt, Mark S. & Masulis, Ronald W. & Titman, Sheridan, 1984. "The valuation effects of stock splits and stock dividends," Journal of Financial Economics, Elsevier, vol. 13(4), pages 461-490, December. [Downloadable!] (restricted)
  3. Christie, William G & Schultz, Paul H, 1994. " Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1813-40, December. [Downloadable!] (restricted)
  4. Grossman, Sanford J, et al, 1997. "Clustering and Competition in Asset Markets," Journal of Law & Economics, University of Chicago Press, vol. 40(1), pages 23-60, April.
  5. Stevenson, Richard A & Bear, Robert M, 1970. "Commodity Futures: Trends or Random Walks?," Journal of Finance, American Finance Association, vol. 25(1), pages 65-81, March. [Downloadable!] (restricted)
  6. Harris, Lawrence, 1991. "Stock Price Clustering and Discreteness," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(3), pages 389-415. [Downloadable!] (restricted)
  7. Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September. [Downloadable!] (restricted)
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