The underpricing of initial public offerings and the partial adjustment phenomenon☆

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Abstract

This paper documents that the relation of the final offer price to the range of anticipated offer prices disclosed in the preliminary prospectus is a good predictor of initial returns. Issues that have final offer prices which exceed the limits of the offer range have greater underpricing than all other initial public offerings, and are also more likely to increase the number of shares issued. These results are consistent with the pricing and allocation schedule proposed by Benveniste and Spindt (1989), in which shares in an offering are rationed and prices only partially adjust to new information.

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☆

This paper is based on my Ph.D. dissertation at the University of Florida. I am grateful to Roger Huang (chairman), Roy Crum, and Roger Blair of my dissertation committee for their guidance and encouragement. Helpful comments from Susan Chaplinsky, Larry Benveniste, Harry DeAngelo, Craig Dunbar, Jayant Kale, Naveen Khanna, Laura Kodres, Jonathan Paul, Jay Ritter, Cliff Smith (the editor), Bill Wilhelm, Gary Zeune, participants at the University of Michigan workshops, and an anonymous referee are appreciated. This paper was presented under the title ‘The Relationship of Offer Price to the Preliminary File Range and the Use of the Overallotment Option in Initial Public Offerings’ at the 1990 Western Finance Association meetings.

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Copyright © 1993 Published by Elsevier B.V.