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Do Underwriters Price Up IPOs to Prevent Withdrawal?

Published online by Cambridge University Press:  09 August 2019

Walid Y. Busaba ,
Zheng Liu  and
Felipe Restrepo
Walid Y. Busaba*
Affiliation:
Busaba, wbusaba@ivey.ca, Western University Ivey Business School
Zheng Liu
Affiliation:
Liu, liuz@highstreet.ca, Highstreet Asset Management
Felipe Restrepo
Affiliation:
Restrepo, frestrepo@ivey.ca, Western University Ivey Business School
*
Busaba (corresponding author), wbusaba@ivey.ca
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Abstract

We examine whether underwriters price up weakly demanded initial public offerings (IPOs) to prevent withdrawal. Our empirical strategy exploits a discontinuity in the distribution of IPO prices around the low boundary of the filing range. Offerings with a high ex ante withdrawal probability that are priced at this boundary are likely priced up to meet issuers’ reservation prices. We compare the aftermarket returns of these IPOs to the returns of other weakly demanded offerings where issuers’ reservation prices were likely not binding, and we identify a negative 8.4-percentage-point differential attributable to the aggressive pricing inherent in setting the price at the low boundary when withdrawal risk is high.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 6 , September 2020 , pp. 2005 - 2036
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank the following for helpful comments and suggestions: Pat Fishe (the referee), Paul Malatesta (the editor), Phil Strahan, Bill Wilhelm, Xiaoyun Yu, and Feng Zhang; seminar participants at Suffolk University, the University of Rhode Island, the University of Regina, the University of Windsor, the University of Ottawa, and Wilfrid Laurier University; and participants at the 2013 meetings of the Multinational Finance Society (discussant Ufuk Gucbilmez), the 2013 meetings of the Northern Finance Association (discussant Ming Dong), the 2014 meetings of the Financial Management Association (discussant Donghang Zhang), and the 2015 Ontario Universities Accounting and Finance Symposium.

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