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Do Underwriters Price Up IPOs to Prevent Withdrawal?

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  • Busaba, Walid Y.
  • Liu, Zheng
  • Restrepo, Felipe

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.

Suggested Citation

  • Busaba, Walid Y. & Liu, Zheng & Restrepo, Felipe, 2020. "Do Underwriters Price Up IPOs to Prevent Withdrawal?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(6), pages 2005-2036, September.
    • Handle: RePEc:cup:jfinqa:v:55:y:2020:i:6:p:2005-2036_8
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    Cited by:

    1. Boeh, Kevin K. & Dunbar, Craig G., 2021. "Raising capital after IPO withdrawal," Journal of Corporate Finance, Elsevier, vol. 69(C).
    2. Petkevich, Alex & Samdani, Taufique, 2022. "The equilibrium prices of auction IPO securities: Empirical evidence," Journal of Financial Markets, Elsevier, vol. 57(C).
    3. Humphrey, Jarrod, 2024. "Beyond the IPO horizon: Understanding the determinants and consequences of IPO withdrawal," Journal of Business Venturing Insights, Elsevier, vol. 21(C).
    4. Amaya, Diego & Filbien, Jean-Yves & Kooli, Maher, 2022. "Media coverage and the decision to withdraw an IPO," International Review of Financial Analysis, Elsevier, vol. 84(C).
    5. Busaba, Walid Y. & Restrepo, Felipe, 2022. "The “7% solution” and IPO (under)pricing," Journal of Financial Economics, Elsevier, vol. 144(3), pages 953-971.

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