The Partial Adjustment of IPO Prices: Information or Speculation?

Abstract

This paper reexamines the partial adjustment of prices of Initial Public Offerings (IPOs) by using a hand-collected dataset of refiling IPOs (IPOs with new price ranges updated in amendments after the preliminary but before the final prospectuses). 185 out of randomly selected 422 IPOs (43.8%) from May 1996 to September 2002 are identified as refiling IPOs. The price revisions are defined piecewise for these refilling IPOs: refiling price revisions (the deviation between the midpoints of the refiling price range and the file price range) and sub-price revisions (the difference between the offer price and the midpoint of the refiling price range). A puzzling two-stage partial adjustment is found: Issuers tend to partially adjust the refiling price with respect to negative information incurred at refiling but partially adjust the offer price with respect to positive information obtained from refiling to offering. This result holds even after controlling for sample-selection bias. It is the first time that evidence is provided for the partial adjustment with respect to negative private information. It challenges the asymmetric information theory of IPO underpricing from a different perspective as the partial adjustment to public information documented in previous literature has already raised questions. Issuers' inconsistent attitudes toward positive and negative private information are somewhat consistent with recent research on withdrawn IPOs and the role of underwriters. The former states that underwriters partially incorporate negative information in early bookbuilding period to decrease the probability of withdrawn but partially adjust offer prices with respect to positive information in later bookbuilding period to induce truth telling of investors. The latter complements Purnanandam and Swaminathan (2002), where IPOs may be 'overvalued' but 'underpriced'. Underwriters of IPOs play a dual role of information acquisition and managing investors' expectation.