Offering price clusters and underpricing in the US primary market

Abstract

This study extends the microstructure literature by examining the offering prices in the United States Initial Public Offering (IPO) market for the presence of clusters. It is found that the use of whole prices is more frequent in the IPO market than in secondary stock markets. Offering prices in the IPO market exhibit a dominant clustering at whole fives and tens (5s and 0s) that cannot be adequately explained by existing hypotheses. Unlike other studies on IPO underpricing, this study examines the impact of offering price clusters on the degree of underpricing. It is documented that whole-priced IPOs are underpriced more relative to fractional-priced IPOs. It is found that the negotiations hypothesis and the implicit collusion hypothesis are not adequate explanations and leave this puzzle to be resolved by future research.

Explaining mispricing of initial public offerings in Singapore

“…Statistically significant associations relating to offering characteristics include proxy measures such as offer price (Chiang and Harikumar, 2004), and underwriting fee (Jenkinson and Ljungqvist, 2001). Important proxies for uncertainty include the number of risk factors (Beatty and Welch, 1996), uses of proceeds (Beatty and Ritter, 1986), and disclosure of earnings forecasts (Clarkson and Merkley, 1994).…”

Price clustering of IPOs in the secondary market

“…5 Harris (1989Harris ( , 1991 show that price clustering based on closing prices from CRSP is virtually identical to price clustering based on intraday transaction prices. Following Harris (1991) and Chiang and Harikumar (2004), I use CRSP closing prices to calculate integer frequency.…”

“…For example, Harris (1991) finds that about 20% of stocks have integer closing prices in the secondary market. Bradley et al (2004) and Chiang and Harikumar (2004) document much higher integer price clustering in the primary market -more than 70% of Initial Public Offerings (IPOs) have integer offer prices. However, existing studies do not examine the huge difference between the integer price frequency in the secondary market and that in the primary market.…”

Long-Run Underperformance And The Offering Price Clustering Phenomenon

“…First, it is relatively cleaner than alternative data sources . Second, given the documented relationship between offering price clusters and underpricing with the use of this dataset by Chiang and Harikumar (2004), it would be interesting to see whether the economic significance of offering price clusters can be further enhanced by studying the relationship between offering price clusters and underperformance with the use of the same dataset. Third, by calendar year 1999, over 93% of all U.S. IPOs are priced at whole prices (Mola and Loughran, 2004).…”

“…This is because, once the firm and their underwriters have estimated the total value of the IPO and have determined the fraction to sell, they have ample latitude in choosing any combination of number of shares and offering price. Despite the seemingly insignificant economic role played by the offering price, Chiang and Harikumar (2004) and Bradley, Cooney, Jordan, and Singh (2004) find that whole-priced IPOs are underpriced more relative to fractional-priced IPOs. 1 In addition, Fernando, Krishnamurthy and Spindt (2002) document that low-and high-priced offers are associated with greater underpricing compared to medium-priced offers.…”