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Why are European IPOs so rarely priced outside the indicative price range?

  • Jenkinson, Tim
  • Morrison, Alan D.
  • Wilhelm, William Jr.

In contrast to practice in the U.S., European IPOs are very rarely priced outside the indicative price range, and frequently are priced at its upper bound. We develop a model that provides a rationale for this seemingly inefficient pricing behaviour. The model allows for the practice, observed in Europe but not in the U.S., whereby underwriters obtain information from investors prior to establishing the indicative price range. With this alternative staging of the information game, first studied by Benveniste and Spindt (1989), a commitment to not exceeding the upper bound is necessary to extract private information from investors. The model has important implications for empirical research based on European primary market data.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 80 (2006)
Issue (Month): 1 (April)
Pages: 185-209

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Handle: RePEc:eee:jfinec:v:80:y:2006:i:1:p:185-209
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  1. Tinic, Seha M, 1988. " Anatomy of Initial Public Offerings of Common Stock," Journal of Finance, American Finance Association, vol. 43(4), pages 789-822, September.
  2. 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.
  3. 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.
  4. Francesca Cornelli, 2001. "Bookbuilding and Strategic Allocation," Journal of Finance, American Finance Association, vol. 56(6), pages 2337-2369, December.
  5. Biais, Bruno & Bossaerts, Peter & Rochet, Jean-Charles, 2002. "An Optimal IPO Mechanism," Review of Economic Studies, Wiley Blackwell, vol. 69(1), pages 117-46, January.
  6. Aghion, Philippe & Bolton, P. & Tirole, J., 2004. "Exit Options in Corporate Finance: Liquidity versus Incentives," Scholarly Articles 12500289, Harvard University Department of Economics.
  7. 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.
  8. Daniel J. Bradley & Bradford D. Jordan & Jay R. Ritter, 2003. "The Quiet Period Goes out with a Bang," Journal of Finance, American Finance Association, vol. 58(1), pages 1-36, 02.
  9. Jay R. Ritter, 2003. "Differences between European and American IPO Markets," European Financial Management, European Financial Management Association, vol. 9(4), pages 421-434.
  10. Francesca Cornelli & David Goldreich, 2003. "Bookbuilding: How Informative Is the Order Book?," Journal of Finance, American Finance Association, vol. 58(4), pages 1415-1443, 08.
  11. Chowdhry, Bhagwan & Sherman, Ann, 1996. "International differences in oversubscription and underpricing of IPOs," Journal of Corporate Finance, Elsevier, vol. 2(4), pages 359-381, July.
  12. Loffler, Gunter & Panther, Patrick F. & Theissen, Erik, 2005. "Who knows what when? The information content of pre-IPO market prices," Journal of Financial Intermediation, Elsevier, vol. 14(4), pages 466-484, October.
  13. Jenkinson, Tim & Jones, Howard, 2002. "Bids and Allocations in European IPO Bookbuilding," CEPR Discussion Papers 3644, C.E.P.R. Discussion Papers.
  14. Sherman, Ann E, 2000. "IPOs and Long-Term Relationships: An Advantage of Book Building," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 697-714.
  15. 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.
  16. Alexander P. Ljungqvist & Tim Jenkinson & William J. Wilhelm, Jr., 2003. "Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors," Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 63-99.
  17. Sherman, Ann Guenther, 1992. " The Pricing of Best Efforts New Issues," Journal of Finance, American Finance Association, vol. 47(2), pages 781-90, June.
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