Valuation and pricing strategy for IPOs

Abstract

The purpose of this study was to investigate how underwriters estimate the fair value of IPO firms and how they decide on the final offer prices for IPOs. We employ comprehensive data on 2609 IPOs from 1975 to1984 extracted from Jay Ritter’s database. Data on U.S. IPOs from 2000 to 2013 that include the offer price, first closing price from IPO SCOOP, and data from1651 Japanese IPOs using book building from Sep 1997 to Dec 2009, that include the file price ranges, gross proceeds and first day returns. Since investors are price makers and they usually lack sufficient information, this paper may help increasing the understanding of valuation model that underwriters employed and available information that might potentially contribute the final offer price. We found that there are significant biases in offer prices, which is announced at the time the offer is filed. And our results show that the IPO pricing process is a complicated function of many factors. Some of the dynamics are explainable under the information asymmetry theory or the partial updating theory, but other patterns remain puzzles.