An Investigation of the Partial Adjustment Effect of Brazilian IPOs

Global literature reports positive initial return in IPOs, or “money left on the table” by the issuing companies. One possible cause is that when the underwriter perceives high demand, she adjusts upward the offer price, but not the full fair price. This partial adjustment creates positive first day return, which is used to compensate informed investors for revealing truthful information during the book building process. We investigate Brazilian IPOs issued between 2004 and 2012 and find evidence similar to the findings in the US. The launching price is lower than the first day closing price, and underwriter increases the number of shares in the aftermarket with the overallotment option. The new shares issued in the aftermarket reduces the “money left on the table” and at the same time compensates informed investors. Surprisingly the underpricing is less than half of the one reported in the US.