Bias and industry practice in IPO pricing

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Abstract: The fact that initial-to-final IPO price revision ratios are strong predictors of IPO underpricing is well known to researchers. Our study documents that the dollar amount of the price revision matters above and beyond the revision ratio, and dramatically so. Immediately following the IPO, market participants appear to see a positive signal in greater dollar amount revisions, even holding price revision ratios equal. This extends Shue and Townsend’s (2021) finding of market participants’ “non-proportional thinking” to the IPO setting. It also implies that the dollar amount of price revision and the mechanism by which price revisions are achieved (e.g., pre-IPO splits) deserve attention from future IPO researchers. We show preliminary findings on pre-IPO splits that suggest this is not the main mechanism of IPO price manipulation.


Keywords: Behavioral finance, Initial public offering (IPO), Psychological pricing