The offering price is the price at which an underwriter offers the primary and secondary shares to the public. The valuation of an IPO is a function of negotiations between the underwriter and the issuer.
The offer price, therefore the market value of the company, determines the estimated proceeds of the IPO and the percentage of the firm that will be sold to investors (Loughran and Ritter, 2002).
By the end of road show, the lead underwriter has an idea about the interest of the investors in the company. The assessment of the level of interest will assist the lead underwriter in determining the final offer price and the size of the offering.
The offer price is characterized by the general economy, the performance of stocks of comparable companies already traded publicly, the firm-level information, and the status of the market as a whole (Kuhn, 1990). Underwriters play a crucial role in pricing the issue.
The reputation of the underwriter is effective in terms of negotiation power for the offer price. High-prestige underwriters have extensive networks and are able to create a high demand toward issues. The degree of underpricing depends on the proper valuation of the offering price by the lead underwriter.
The offer price can be easily modified above or below the filing range to compensate for additional or insuficient demand for a stock (Hanley, 1993). While IPOs are frequently set outside the file range in the United States, IPOs are rarely priced outside the range in Europe and in Japan.