Two-step price adjustments of IPO book building in Japan

Abstract

This study examines how IPO shares are priced and allocated under the book-building system in Japan. The filing price range is the rigid base for all subsequent price developments in Japan; by contrast, it is flexibly and frequently changed during book building in the U.S. We find that price adjustment during a roadshow conveys firm fundamental information, whereas price adjustment in subsequent book building conveys investor sentiment information. We also demonstrate that investor sentiment dominates the formation of initial returns and aftermarket reversals. Furthermore, institutional allocation is unresponsive to the private information revealed during the roadshow but is positively associated with initial returns, indicating the importance of quid pro quo allocation. Overall, our results on partial price adjustments, aftermarket reversals, and retail-oriented allocations are more consistent with Lowry and Schwert's (2004) implicit contract hypothesis than with any other hypotheses.