Review of Finance Advance Access published online on September 21, 2009
Review of Finance, doi:10.1093/rof/rfp021
IPO Information Aggregation and Underwriter Quality*
1 University of New Orleans
2 University of Colorado
A key distinction between some models of IPO pricing (e.g., auctions and bookbuilding) and others (e.g., fixed-priced models) is whether price discovery occurs in the primary or secondary market. Higher investment bank reputation is associated with 1) more active filing price revisions and 2) reduced secondary market volatility, indicating greater resolution of uncertainty before trading begins. Revisions of nonreputable banks cluster on exactly zero dollars. Finally, the "partial adjustment" phenomenon – often attributed to information aggregation – is primarily due to the behavior of reputable underwriters. We conclude that theoretical models of primary market information aggregation are better suited for reputable underwriters.
JEL Classification: G24
* We thank seminar participants at the University of Oxford 2008 Symposium on Initial Public Offerings, Florida State University, University of Colorado, University of Kentucky, Texas A&M, University of Texas at Dallas, University of Hong Kong, City University of Hong Kong, University of New Orleans, the University of Virginia and the Securities and Exchange Commission. Particular thanks go to James Ang, Don Autore, Kerry Back, Alex Butler, Ekkhart Boehmer, Mike Gallmeyer, Kathleen Hanley, Gerard Hoberg, Eric Hughson, Danling Jiang, Robert Kieschnick, Chris Leach, Mark Liu, Steve Manaster, Ron Masulis, Nathalie Moyen, Rina Ray, Jay Ritter, Jason Smith, Bill Wilhelm, Keith Wong, Xueping Wu, Jaime Zender and Harold Zhang for their comments. All remaining errors are our own.