Preopening auctions and price discovery in initial public offerings

Abstract

Using a proprietary dataset for 97 IPO firms, we examine investors’ trading activities in newly listed firms during the one-hour preopening auction on the Bombay Stock Exchange on the listing day. We document significant price discovery during the preopen. We find that the offer-to-first quote returns largely explain IPO initial returns. The probability of informed trading is much higher during the preopen than during the trading day, and trades by institutional investors are more informative than those by other investors. We also find that illiquidity decreased after the introduction of the preopening auction.