We are grateful to Bill Christie (Editor) and an anonymous referee for their helpful comments and suggestions, and Wendy Jennings for copy editing. The paper has also benefited from the comments received at presentations at University of Connecticut, Union College, University of Alaska, University of Auckland, and the FMA Annual Meeting.
Does IPO Pricing Reflect Public Information? New Insights from Equity Carve-Outs
Article first published online: 11 MAR 2012
© 2012 Financial Management Association International.
Volume 41, Issue 1, pages 1–33, Spring 2012
How to Cite
Ghosh, C., Petrova, M., Feng, Z. and Pattanapanchai, M. (2012), Does IPO Pricing Reflect Public Information? New Insights from Equity Carve-Outs. Financial Management, 41: 1–33. doi: 10.1111/j.1755-053X.2012.01176.x
- Issue published online: 28 MAR 2012
- Article first published online: 11 MAR 2012
We examine the efficiency of initial public offering (IPO) pricing using a sample of over 300 equity carve-outs from 1985 to 2009. The partial adjustment theory posits that the initial return of IPOs is predictable based on private information, but public information is fully incorporated. Prospect theory is consistent with both private and public information not being fully incorporated in the offer price. Our analysis confirms that both price update and initial return of carve-out IPOs can be predicted based on the parent firm's returns during the prepricing and preissuing periods. Further, postissue ownership of the parent firm is associated with significantly higher price update and initial return, while IPOs where the majority of the proceeds are paid out register lower initial return. The size of the subsidiary and relative size of the offering are also significantly related to price update and initial return. These findings are consistent with prospect theory.