Price discovery is one of the most important functions of any stock exchange. In primary markets, this reflects the degree to which prior expectations, regarding the value of the offering, are revised in response to get feedback from investors and the market before the of er price is set.
Before the offer price is set globally, the issuer is required to file an offering range and issue size, which is used to calculate filing fees. The offering range includes the maximum and the minimum value an IPO can have once it will go public.
The width of the offering range is an initial indication for the final value of the offer price. Higher offer price gives flexibility to the investment bank to set a price that fits more to the demand by investors and the information that has been revealed during the book building period.
Jenkinson et al. (2003) state that “significant information acquisition prior to the establishing of the indicative price range of European IPOs makes it more informative than the indicative price range for comparable U.S. IPOs.”
In addition, the authors state that the final price is firmly set at the upper end of the initial range in nearly 47% of European IPOs compared with less than 19% of U.S. IPOs. The reason for the European concentration at the higher end, even if the price range revision in Europe appears no more onerous than in the United States, seems to be the avoidance of some extra days for the revision of the issue.
Aggarwal et al. (2002) report that outside the United States only one-tenth of IPOs have a final price set outside the initial offer range. However, nearly 50% of all U.S. IPOs are priced outside the initial range. Most IPOs priced outside the filing range are the ones where significant information acquisition occurs during the bookbuilding period.
Hanley (1993) assumes that issues with an offer price greater than the upper bound of the price range (disclosed in the issuing firms’ preliminary prospectus) draw relatively strong institutional interest prior to the offering.
The author reports that issues priced within the offer range draw moderate interest, while those offered at a price below the lower band of the offer range draw relatively weak interest prior to the offering.