Long-Run Underperformance And The Offering Price Clustering Phenomenon

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The study proposes a new informational role for the offering price of an equity IPO.<span style="mso-spacerun: yes;">  </span>Offering prices are quoted either in whole prices (e.g., $2, $11, $19, etc) or fractional prices (e.g., $2.35, $11.15, $15.75, etc).<span style="mso-spacerun: yes;">  </span>Using Jay R. Ritter’s sample of 1,526 IPOs issued during the period 1975 to 1984, the study examines the relation between the presence of whole price clusters and long-run underperformance.<span style="mso-spacerun: yes;">  </span>The results indicate that fractional offering prices are associated with better long-run performance.<span style="mso-spacerun: yes;">   </span></span></span></p>