IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v18y2012i2p331-348.html
   My bibliography  Save this article

Information precision and IPO pricing

Author

Listed:
  • Zhang, Feng

Abstract

This paper investigates the role of information precision in IPO pricing. The model shows that more precise information will exert more influence on the offer price. In strong support of the model, I find that the proportion of the industry return during the waiting period that is incorporated into the offer price increases with a proxy for the precision of the industry return as a measure of the change in the IPO firm's value during the waiting period. The model and the empirical findings enhance our understanding of the partial adjustment phenomenon: noisy information will be partially incorporated into the offer price.

Suggested Citation

  • Zhang, Feng, 2012. "Information precision and IPO pricing," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 331-348.
  • Handle: RePEc:eee:corfin:v:18:y:2012:i:2:p:331-348 DOI: 10.1016/j.jcorpfin.2012.01.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119912000053
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mark Grinblatt & Chuan Yang Hwang, "undated". "Signalling and the Pricing of Unseasoned New Issues," Rodney L. White Center for Financial Research Working Papers 1-89, Wharton School Rodney L. White Center for Financial Research.
    2. Chemmanur, Thomas J & Fulghieri, Paolo, 1999. "A Theory of the Going-Public Decision," Review of Financial Studies, Society for Financial Studies, pages 249-279.
    3. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
    4. Lawrence M. Benveniste & Alexander Ljungqvist & William J. Wilhelm & Xiaoyun Yu, 2003. "Evidence of Information Spillovers in the Production of Investment Banking Services," Journal of Finance, American Finance Association, vol. 58(2), pages 577-608, April.
    5. Michelle Lowry & Micah S. Officer & G. William Schwert, 2010. "The Variability of IPO Initial Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 425-465, April.
    6. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    7. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    8. Sherman, Ann E. & Titman, Sheridan, 2002. "Building the IPO order book: underpricing and participation limits with costly information," Journal of Financial Economics, Elsevier, vol. 65(1), pages 3-29, July.
    9. Tim Loughran & Jay R. Ritter, 2002. "Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?," Review of Financial Studies, Society for Financial Studies, pages 413-444.
    10. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    11. Francesca Cornelli & David Goldreich, 2003. "Bookbuilding: How Informative Is the Order Book?," Journal of Finance, American Finance Association, vol. 58(4), pages 1415-1443, August.
    12. Chemmanur, Thomas J, 1993. " The Pricing of Initial Public Offerings: A Dynamic Model with Information Production," Journal of Finance, American Finance Association, vol. 48(1), pages 285-304, March.
    13. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    14. Benveniste, Lawrence M. & Busaba, Walid Y. & Wilhelm, William Jr., 2002. "Information Externalities and the Role of Underwriters in Primary Equity Markets," Journal of Financial Intermediation, Elsevier, pages 61-86.
    15. Sherman, Ann E., 2005. "Global trends in IPO methods: Book building versus auctions with endogenous entry," Journal of Financial Economics, Elsevier, vol. 78(3), pages 615-649, December.
    16. Hanley, Kathleen Weiss, 1993. "The underpricing of initial public offerings and the partial adjustment phenomenon," Journal of Financial Economics, Elsevier, vol. 34(2), pages 231-250, October.
    17. Chris Yung, 2005. "IPOs with Buy- and Sell-Side Information Production: The Dark Side of Open Sales," Review of Financial Studies, Society for Financial Studies, pages 327-347.
    18. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-387, May.
    19. Benveniste, Lawrence M. & Wilhelm, William J., 1990. "A comparative analysis of IPO proceeds under alternative regulatory environments," Journal of Financial Economics, Elsevier, vol. 28(1-2), pages 173-207.
    20. Sherman, Ann E, 2000. "IPOs and Long-Term Relationships: An Advantage of Book Building," Review of Financial Studies, Society for Financial Studies, pages 697-714.
    21. Bradley, Daniel J. & Jordan, Bradford D., 2002. "Partial Adjustment to Public Information and IPO Underpricing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(04), pages 595-616, December.
    22. Lee, Peggy M. & Wahal, Sunil, 2004. "Grandstanding, certification and the underpricing of venture capital backed IPOs," Journal of Financial Economics, Elsevier, vol. 73(2), pages 375-407, August.
    23. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
    24. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
    25. Welch, Ivo, 1989. " Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 44(2), pages 421-449, June.
    26. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
    27. Carter, Richard B & Manaster, Steven, 1990. " Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-1067, September.
    28. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. " Investment Bank Reputation, Information Production, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 49(1), pages 57-79, March.
    29. Barry, Christopher B. & Muscarella, Chris J. & Peavy, John III & Vetsuypens, Michael R., 1990. "The role of venture capital in the creation of public companies*1: Evidence from the going-public process," Journal of Financial Economics, Elsevier, vol. 27(2), pages 447-471, October.
    30. Lowry, Michelle & Schwert, G. William, 2004. "Is the IPO pricing process efficient?," Journal of Financial Economics, Elsevier, vol. 71(1), pages 3-26, January.
    31. 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.
    32. Edelen, Roger M. & Kadlec, Gregory B., 2005. "Issuer surplus and the partial adjustment of IPO prices to public information," Journal of Financial Economics, Elsevier, vol. 77(2), pages 347-373, August.
    33. Gerard Hoberg, 2007. "The Underwriter Persistence Phenomenon," Journal of Finance, American Finance Association, vol. 62(3), pages 1169-1206, June.
    34. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Time-varying exchange rate exposure and exchange rate risk pricing in the Canadian Equity Market," Economic Modelling, Elsevier, vol. 37(C), pages 451-463.
    2. Edmund Mantell, 2016. "A theory of underwriters’ risk management in a firm-commitment initial public offering," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 179-193, January.
    3. Edmund H. Mantell, 2016. "A theory of underwriters’ risk management in a firm-commitment initial public offering," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 179-193, January.
    4. repec:eee:reveco:v:51:y:2017:i:c:p:295-313 is not listed on IDEAS

    More about this item

    Keywords

    Information precision; IPOs; Partial adjustment; Price adjustment; Share adjustment;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:18:y:2012:i:2:p:331-348. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.