Does IPO Pricing Reflect Public Information? New Insights from Equity Carve-Outs


  • 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.

Chinmoy Ghosh is a Professor and Head of the Department of Finance at the University of Connecticut in Storrs, CT. Milena Petrova is an Assistant Professor in the Department of Finance, Whitman School of Management at Syracuse University in Syracuse, NY. Zhilan Feng is an Associate Professor in the School of Management at Union Graduate College in Schenectady, NY. Maneechit Pattanapanchai is an Economist on the Ways & Means Committee in the New York State Assembly in Albany, NY.


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.