Why are European IPOs so rarely
priced outside the indicative price range?
Alan Morrison, Tim
Jenkinson William J. Wilhelm, Jr.
contrast to practice in the U.S., European IPOs are very rarely priced
outside the indicative price range, and frequently are priced at its upper
bound. We develop a model that provides a rationale for this seemingly
inefficient pricing behaviour. The model allows for the practice, observed
in Europe but not in the U.S., whereby underwriters obtain information from
investors prior to establishing the indicative price range. With this
alternative staging of the information game, first studied by Benveniste and
Spindt (1989), a commitment to not exceeding the upper bound is necessary to
extract private information from investors. The model has important
implications for empirical research based on European primary market data.
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