IPO price revisions: The competitive versus information effects

In this dissertation, I examine two aspects of initial public offerings (IPOs). First, I test how an IPO’s price revision affects other firms in the same industry. Under the competitive effect hypothesis, the IPO firm benefits at the expense of its competitors; therefore, an upward revision of the offer price of the IPO firm should result in a decrease in stock prices of peer firms and vice versa. However, the offer price revision also reflects information revealed during the IPO’s book-building process. Therefore, under the information effect hypothesis, the positive information reflected in an upward revision of the offer price should lead to an increase in stock prices of peers and vice versa. Using hand-collected data from 1996 to 2013, I find evidence supportive of a stronger information effect compared to the competitive effect. Second, I examine how the market reaction of industry peers to the filing of an IPO is related to the probability that the IPO will be successful. Under the competitive effect hypothesis, a positive reaction of industry peers to the filing of an IPO should reduce the likelihood of a successful IPO while the information effect hypothesis predicts an increased likelihood of success. Again, consistent with the information effect hypothesis, I find a positive relation between cumulative abnormal returns (CARs) of industry peers around the registration date of an IPO and also the date of the filing of the initial price range and the probability that the IPO is successful. Specifically, an increase in CARs of industry peers leads to an increase in the probability that an IPO is completed compared to withdrawn and for competed IPOs, an increased probability of an upward-revised offer price.