Using A Two Treatment Factorial Design To Analyze The First Day Percent Change In Price For Initial Public Offerings

Abstract

An area of considerable interest in finance is the behavior of IPO stock prices on the first day of issue.  This paper uses a sample of 282 IPOs from 2002 through 2007 to investigate the performance of the first day percent change in price (FDPCP) of these stocks.  A two treatment factorial design is utilized to determine if two factors impact the mean value of this variable.  The first factor, or treatment, is the relationship between the final offer price and the price range found in the prospectus associated with SEC Form S-1, also known as the "red herring."  The second treatment is the state of the market at the time of issue, bull or bear.  This experimental design allows for the testing of three hypotheses.  The first hypothesis looks at the relationship between the mean value of the FDPCP and the value of the final offer price relative to the filing range found in the initial prospectus.  The second hypothesis looks at the relationship between the mean value of the FDPCP and the state of the market at the time of issue, while the third hypothesis seeks to determine if there is an interaction between the two treatments.