Partial Adjustment to Public Information in the Pricing of IPOs
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Date
2016-01Metadata
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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.