Long-Run Underperformance And The Offering Price Clustering Phenomenon

Abstract

The study proposes a new informational role for the offering price of an equity IPO. Offering prices are quoted either in whole prices (e.g., $2, $11, $19, etc) or fractional prices (e.g., $2.35, $11.15, $15.75, etc). Using Jay R. Ritter’s sample of 1,526 IPOs issued during the period 1975 to 1984, the study examines the relation between the presence of whole price clusters and long-run underperformance. The results indicate that fractional offering prices are associated with better long-run performance.