Negotiation and the IPO Offer Price: A Comparison of Integer vs. Non-Integer IPOs

We investigate the pricing of 4,989 equity IPOs with offer dates between 1981 and 2000. Approximately three-fourths of these IPOs have integer offer prices. Average initial returns for IPOs with integer offer prices are significantly higher (24.5%) than those priced on the fraction of the dollar (8....

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Bibliographic Details
Published in:Journal of financial and quantitative analysis 2004-09, Vol.39 (3), p.517-540
Main Authors: Bradley, Daniel J., Cooney, John W., Jordan, Bradford D., Singh, Ajai K.
Format: Article
Language:English
Subjects:
Bargaining
Comparative analysis
Conditioning
Finance
Initial public offering
Initial public offerings
Integers
Market prices
Negotiation
P values
Price volatility
Prices
Pricing policies
Quantitative analysis
Standard deviation
Statistical discrepancies
Stock prices
Uncertainty
Value weighted index
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Summary:We investigate the pricing of 4,989 equity IPOs with offer dates between 1981 and 2000. Approximately three-fourths of these IPOs have integer offer prices. Average initial returns for IPOs with integer offer prices are significantly higher (24.5%) than those priced on the fraction of the dollar (8.1%). This result is robust through time and after conditioning for other effects known to influence initial returns. We hypothesize that integer vs. fractional dollar IPOs are the result of negotiations between the issuing firm and underwriter. Under this negotiation hypothesis, the frequency of integer pricing should be an increasing function of the offer price and the degree of uncertainty surrounding the value of the firm. Empirical evidence, supportive of the negotiation hypothesis, is presented.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109000004014