Premium
Does IPO Pricing Reflect Public Information? New Insights from Equity Carve‐Outs
Author(s) -
Ghosh Chinmoy,
Petrova Milena,
Feng Zhilan,
Pattanapanchai Maneechit
Publication year - 2012
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2012.01176.x
Subject(s) - initial public offering , equity (law) , private information retrieval , sample (material) , business , rate of return , monetary economics , economics , ask price , financial economics , microeconomics , finance , statistics , chemistry , mathematics , chromatography , political science , law
We examine the efficiency of initial public offering (IPO) pricing using a sample of over 300 equity carve‐outs from 1985 to 2009. The partial adjustment theory posits that the initial return of IPOs is predictable based on private information, but public information is fully incorporated. Prospect theory is consistent with both private and public information not being fully incorporated in the offer price. Our analysis confirms that both price update and initial return of carve‐out IPOs can be predicted based on the parent firm's returns during the prepricing and preissuing periods. Further, postissue ownership of the parent firm is associated with significantly higher price update and initial return, while IPOs where the majority of the proceeds are paid out register lower initial return. The size of the subsidiary and relative size of the offering are also significantly related to price update and initial return. These findings are consistent with prospect theory.