Is the Offer Price in IPOs Informative? Underpricing, Ownership Structure, and Performance

When firms go public in an IPO, they must choose a number of shares to offer and a price level for those shares. Given an estimated total value, this division would seem to have little economic significance. Casual empiricism and the evidence from stock splits, however, suggest that firms do not choose their IPO share price level arbitrarily. We ask whether IPO prices are informative, in the sense that they relate systematically to other choices made by the firm and to firm characteristics. We find that IPO prices are informative in this sense. We find that the relationship between IPO price level and underpricing is U-shaped, and demonstrate economically significant differences across firms choosing different IPO prices in the amounts of money left on the table due to underpricing. We also find that institutional ownership and underwriter reputation are greater at higher price levels, and that post-IPO turnover is lower for high-priced IPOs than for mid-priced IPOs. Moreover, firms choosing a higher (lower) stock price level experience lower (higher) mortality rates. Taken together, our results provide strong evidence that the corporate decision that involves picking a share price level has economic significance.