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Partial Adjustment to Public Information in the Pricing of IPOs

Bakke, Einar; Leite, Tore E.; Thorburn, Karin S.
Working paper
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URI
http://hdl.handle.net/11250/2375654
Date
2016-01
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  • Working papers (FIN) [10]
Abstract
Extant literature shows that IPO first-day returns are correlated with market returns preceding

the issue. We propose a new explanation for this puzzling predictability by adding a public

signal to Benveniste and Spindt (1989)'s information-based framework. A novel result of our

model is that the compensation required by investors to truthfully reveal their information

decreases with the public signal. This "incentive e ffect" receives strong empirical support in a

sample of 6,300 IPOs in 1983-2012. The positive relation between initial returns and pre-issue

market returns disappears for top-tier underwriters, where the order book is most informative,

e ffectively resolving the predictability puzzle.
Publisher
FIN

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