Two-stage Partial Adjustments: Evidence from Refiling Behavior in the IPO Pricing Process

Abstract

This paper reexamines the relationship between price revisions and underpricing of Initial Public Offerings (IPOs). The price revisions are defined piecewise for IPOs with refiling(s) (the behavior of updating a new price range) in the IPO pricing process: 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). 185 out of 422 IPOs in our sample (43.8%) are identified as refiling IPOs by our hand-collected data. The refiling behavior is modeled under the similar framework of information-acquisition models. Different from Bradley and Jordan (2002), our findings support the asymmetric information theory of IPO underpricing. However, we also first document a two-stage partial adjustment for the refiling IPOs: the issuers tend to partially adjust the refiling price with respect to the negative information incurred at the refiling but partially adjust the offer price with respect to the positive information obtained from the refiling to the offering. This two-stage partial adjustment of the refiling IPOs throws doubt on the traditional asymmetric information explanation on IPO underpricing. Alternatively, we provide two plausible but contradictory propositions from the underwriters' perspective. We think that without considering the refiling behavior the price adjustment is misleading: it may not be the simple evidence for the asymmetric information theory of IPO underpricing as we expect.