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Negotiation and the IPO Offer Price: A Comparison of Integer vs. Non-Integer IPOs

Published online by Cambridge University Press:  06 April 2009

Daniel J. Bradley ,
John W. Cooney Jr ,
Bradford D. Jordan  and
Ajai K. Singh
Daniel J. Bradley
Affiliation:
dbradle@clemson.edu, College of Business and Behavioral Science, 324B Sirrine Hall, Clemson University, Clemson, SC 29634;
John W. Cooney Jr
Affiliation:
jcooney@ba.ttu.edu, Rawls College of Business Administration, Texas Tech University, Lubbock, TX 79409;
Bradford D. Jordan
Affiliation:
bjordan@uky.edu, Gatton College of Business and Economics, University of Kentucky, Lexington, KY 40506;
Ajai K. Singh
Affiliation:
aks8@po.cwru.edu, Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland, OH 44106.
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Abstract

We investigate the pricing of 4,989 equity IPOs with offer dates between 1981 and 2000. Approximately three-fourths of these IPOs have integer offer prices. Average initial returns for IPOs with integer offer prices are significantly higher (24.5%) than those priced on the fraction of the dollar (8.1%). This result is robust through time and after conditioning for other effects known to influence initial returns. We hypothesize that integer vs. fractional dollar IPOs are the result of negotiations between the issuing firm and underwriter. Under this negotiation hypothesis, the frequency of integer pricing should be an increasing function of the offer price and the degree of uncertainty surrounding the value of the firm. Empirical evidence, supportive of the negotiation hypothesis, is presented.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 3 , September 2004 , pp. 517 - 540
Copyright
Copyright © School of Business Administration, University of Washington 2004

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