Is the IPO Pricing Process Efficient?

Michelle B. Lowry

Drexel University, Philadelphia, PA 19104

G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research

Journal of Financial Economics 71 (January 2004) 3-26

This paper investigates underwriters' treatment of public information throughout the IPO pricing process. Two key findings emerge. First, public information is not fully incorporated into the initial price range. While the economic magnitude of the bias is small, it is puzzling because it is not clear who benefits from it. Further, it indicates that the filing range midpoint is not an unbiased predictor of the offer price, as prior literature has assumed. Second, while public information is similarly not fully incorporated into the offer price, the small economic significance of this relation indicates that the IPO pricing process is almost efficient.

Key words: IPO, Underpricing, Private Information, Learning, Market Efficiency

JEL Classifications: G32, G24, G14

Cited 119 times in the SSCI and SCOPUS through 2016

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