Offering price clusters and underpricing in the US primary market

Abstract

This study extends the microstructure literature by examining the offering prices in the United States Initial Public Offering (IPO) market for the presence of clusters. It is found that the use of whole prices is more frequent in the IPO market than in secondary stock markets. Offering prices in the IPO market exhibit a dominant clustering at whole fives and tens (5s and 0s) that cannot be adequately explained by existing hypotheses. Unlike other studies on IPO underpricing, this study examines the impact of offering price clusters on the degree of underpricing. It is documented that whole-priced IPOs are underpriced more relative to fractional-priced IPOs. It is found that the negotiations hypothesis and the implicit collusion hypothesis are not adequate explanations and leave this puzzle to be resolved by future research.