Price Discovery from Offer Price to Opening Price of Initial Public Offerings

Abstract

We examine the price discovery process of initial public offerings (IPOs) from the offer price to the first day’s open price. Stock exchanges have made major changes to the IPO preopening process, and introduced an open auction process in which all investors are able to enter orders and participate in price discovery. The time spent in preopening has increased for IPOs over the years, with an average of 77.23 minutes in 2020. The same pattern is not found for special purpose acquisition (SPAC) offerings. The percentage of the day’s volume executed in the IPO Cross is much higher, at 15.3%, than the approximately 1% for non-IPO stocks. Each phase of preopening contributes to incremental price discovery, with almost all of the price adjustment occurring during preopening. However, for “cold” IPOs, half of the price adjustment takes place after the market opens. Even though participation by retail investors has increased during preopening, their role in price discovery is limited. Our results suggest that institutional investors use the IPO Cross to sell shares. We also find that underwriters take advantage of changes implemented after the Facebook IPO that gave them a bigger role in deciding when to release an IPO for trading.