Offer pricing of Australian industrial initial public offers

Abstract

In the present paper we examine the setting of offer prices for Australian industrial initial public offers (IPOs) by fixed price offers. Our investigation focuses on the associations between offer prices and both market prices and accounting based measures of intrinsic value. Fixed-price offers are less likely to be influenced by the canvassing of market demand when compared to the US setting, where book-builds are typically used. We conclude that while Australian industrial IPOs are underpriced, they are not systematically undervalued. Contrary to research undertaken by Purnanandam and Swaminathan in the US book-build setting, we do not conclude that Australian IPOs are systematically overvalued. As part of our analysis, we develop an empirical model of offer prices based on interviews with several leading Australian stockbrokers involved in setting them. Finally, using the ratio of offer price to intrinsic value measure, we find some evidence that undervaluation is positively related to underpricing.