Who Knows What When? - the Information Content of Pre-Ipo Market Prices

Abstract

To resolve the IPO underpricing puzzle it is essential to analyze who knows what when during the issuing process. In Germany, broker-dealers make a market in IPOs during the subscription period. We examine these pre-issue prices and find that they are highly informative. They are closer to the first price that is subsequently established on the exchange than either the midpoint of the bookbuilding range or the offer price. We further document that pre-issue prices are unbiased estimates of the subsequent first exchange price. They explain a large part of the underpricing that cannot be explained by other variables. The results imply that information asymmetries are much lower than the observed variance of underpricing suggests, a finding that is relevant for judging the validity of underpricing theories.