Price Discovery in Initial Public Offerings and the Role of the Lead Underwriter


  • Reena Aggarwal,

  • Pat Conroy

    Search for more papers by this author
    • Aggarwal is at the McDonough School of Business, Georgetown University and Conroy is at Folio[fn], Inc. Part of this work was done while both Aggarwal and Conroy were at the Securities and Exchange Commission (SEC). We thank seminar participants at the SEC, NASD, Georgetown University, the 1999 meetings of the European Financial Management Association, Bill Byrnes, Pat Fishe, Todd Houge, Tim Loughran, Jay Ritter, Pietra Rivoli, René Stulz (the editor), and an anonymous referee for providing very useful comments. This research was partially supported by research grants from Georgetown University and the Capital Markets Research Center. The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or the authors' colleagues upon the staff of the Commission.


We examine the price discovery process of initial public offerings (IPOs) using a unique dataset. The first quote entered by the lead underwriter in the five-minute preopening window explains a large proportion of initial returns even for hot IPOs. Significant learning and price discovery continues to take place during these five minutes with hundreds of quotes being entered. The lead underwriter observes the quoting behavior of other market makers, particularly the wholesalers, and accordingly revises his own quotes. There is a strong positive relationship between initial returns and the time of day when trading starts in an IPO.