Do IPO filing prices reflect firm quality?

Abstract

Purpose

Prior research suggests that institutional investors prefer higher priced stock, while individual investors prefer lower priced stock. The purpose of this paper is to examine whether the IPO filing price reflects firm characteristics that are commonly associated with quality, including size, age, earnings, underwriter reputation and venture capital backing.

Design/methodology/approach

The authors used t-tests, Wilcoxon rank sum tests, logistic and ordinary least squares regressions to test the hypotheses.

Findings

The authors find that IPO filing prices are positively related to measures of quality, except venture backing, which impacts prices non-linearly. Ceteris paribus, small (large) venture backed firms’ filing prices are set significantly lower (higher).

Research limitations/implications

Firm managers set IPO filing prices high when they believe the firm is likely to attract institutional investors due to its size, quality and certification, and will set prices low otherwise.

Practical implications

Individual investors should be wary of IPO firms with lower prices. Managers should be cognizant of the positive relationship between IPO quality and price.

Originality/value

This study provides evidence that IPO prices reflect firm quality and may be set deliberately to attract individual investors when institutional investor demand is expected to be low. It also provides evidence that venture backing affects IPO prices non-linearly, consistent with the grandstanding hypothesis.

Citation

Beierlein, J.J. and Nelson, J. (2019), "Do IPO filing prices reflect firm quality?", Managerial Finance, Vol. 45 No. 4, pp. 499-512. https://doi.org/10.1108/MF-03-2018-0118