IPO Price Clustering and Discreetness

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.