Public Information, IPO Price Formation, and Long-Run Returns: Japanese Evidence





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    • Kenji Kutsuna is with the Graduate School of Business Administration, Kobe University. Janet Kiholm Smith is with the Robert Day School of Economics and Finance, Claremont McKenna College. Richard L. Smith is with the Anderson Graduate School of Management, University of California Riverside and the Drucker Graduate School of Management, Claremont Graduate University. We thank David Chambers, Eric Hughson, Ghon Rhee, Jay Ritter, Rob Stambaugh (the editor), Jean-Marc Suret, Masayoshi Takahashi of Nomura Securities, and especially an anonymous referee for helpful insights and suggestions. Financial support and research assistance were provided by The Financial Economics Institute at the Robert Day School of Economics and Finance, Claremont McKenna College. We also benefited from comments of seminar participants at University of Hawaii, University of California Riverside, Chapman University, the Hitotsubashi University Finance Workshop and the Said School, Oxford European Financial Management 2008 Symposium on Initial Public Offerings.


The price formation process of JASDAQ IPOs is more transparent than in the United States. The transparency facilitates analysis of important issues in the IPO literature—why offer prices only partially adjust to public information and adjust more fully to negative information, and why adjustments are related to initial returns. The evidence indicates that early price information conveys the underwriter's commitment to compensate investors for acquiring and/or disclosing information. Offer prices reflect pre-IPO market values of public companies and implicit agreements between underwriters and issuers that originate well before the offering. Underadjustment of offer prices is substantially reversed in the aftermarket.