ISSUER OPERATING PERFORMANCE AND IPO PRICE FORMATION

Michael Willenborg University of Connecticut m.willenborg@uconn.edu Biyu Wu University of Connecticut biyu.wu@business.uconn.edu

March 14, 2014

ISSUER OPERATING PERFORMANCE AND IPO PRICE FORMATION

ABSTRACT We extend the study of the association between public information and IPO price formation by examining Brau and Fawcetts (2006) chief financial officer survey response that having strong historical earnings is the most important signal of quality an IPO issuer can convey to investors. For a sample of 20012012 IPOs, we find measures of pre-IPO operating performance explain a substantial portion of the variation in the revision from the mid-point of the initial price range to the IPO offer price. Moreover, for these recent IPOs, the partial adjustment phenomenon concentrates among issues with strong performance; whereas for those with weak performance, the downward price adjustment is nearly full. As for why issuers with strong performance seem to acquiesce to a partial increase in offer price, these IPOs have the largest wealth gains from shares sold / retained upon going public. Overall, our results are consistent with Loughran and Ritters (2002) agency / prospect theory explanation for IPO partial adjustment and suggest an important role for historical accounting information in the pricing of book-built IPOs.

Keywords: Operating performance, initial public offerings, partial adjustment, underpricing Data Availability: Public sources

I. INTRODUCTION When a company files to go public in a firm commitment initial public offering (IPO), in either its initial registration statement or a subsequent amendment, it must provide an initial price range within which it expects to sell its shares. Following this disclosure, representatives of the company and its lead underwriters meet with select investors to obtain feedback and indications of interest to price and pre-sell the offering. Subsequent to this road-show period, the offer price decision is made the day before the shares begin to trade. Then, as is well known, on average, the offer price is lower than the first-day closing price. This price formation of IPOs, from initial price range to offer price to closing price on the first trading day, is a topic of longstanding interest. While the latter return (underpricing) garners the majority of attention, understanding the former (price revision) is arguably the key. For example, Ritter and Welch (2002, p. 1803) conclude the solution to the underpricing puzzle has to lie in focusing on the setting of the offer price, where the normal interplay of supply and demand is suppressed by the underwriter. In an influential paper that links setting the offer price with underpricing, Benveniste and Spindt (1989) propose a book-building theory of IPO pricing and allocation by underwriters. In their model, to induce regular (e.g., road-show) investors to divulge indications of strong demand, underwriters only partially revise the range upward to arrive at the offer price. As a result, underpricing of IPO shares, along with discretionary allocation of them, compensates investors for truthful revelation of favorable private information. Consistent with this, Hanley (1993) was the first to document the strong, positive association between the price revision and first-day underpricing (i.e., the partial-adjustment phenomenon). More recently, Loughran and Ritter (2002) posit an agency / prospect theory explanation for the partial adjustment phenomenon. They argue that if issuers anchor on the midpoint of filing range and offset the loss of company proceeds from underpricing on primary shares with their wealth revaluation on retained / secondary shares, they will acquiesce to under-adjustment of the offer price in response to strong demand. Given this emphasis on the covariance between money left on the table and unexpected wealth changes, Loughran and Ritter (2002, p. 438)

assert issuers bargain hard over the offer price in a bad state of the world, whereas they are pushovers in bargaining over the offer price in a good state of the world. Importantly, their explanation makes no distinction between private and public information. In support of this, they show that market returns during the 15 days pre-IPO are positively associated with both the price revision and initial returns and that this association is considerably stronger when returns are negative (i.e., they document partial (nearly full) adjustment to favorable (unfavorable) public information). In his discussion of Loughran and Ritter (2002), Daniel (2002, p. 453) poses [s]ome questions that merit further investigation include [t]o what extent are revisions predictable using information available as of the preliminary prospectus date? From an empirical standpoint, one way to address Daniels (2002) question, and further our understanding of IPO price formation, is to focus on the price revision and advance proxies that plausibly surrogate for favorable or unfavorable public information. In Brau and Fawcetts (2006) survey of chief financial officers (CFOs), all categories of respondents chose having strong historical earnings as the most important positive signal issuers convey to investors regarding the value of a firm going public. In this paper, we study the relation between pre-IPO operating performance and IPO price formation, with a focus on the revision from the mid-point of the initial price range to the offer price. We report evidence of a strong, positive association between pre-IPO operating performance and the price revision; a relation apparent in descriptive statistics, robust to multiple regression and consistent with an identification strategy wherein we substitute stale versions of our performance measures. Overall, these findings are supportive of an important pricing role for the historical accounting information in the IPO prospectus. We study firm commitment, share IPOs by domestic companies from January 2001 to December 2012. At average underpricing of 13.2%, these IPOs sustain a comparable fraction of money left on the table as the pre-bubble samples of Loughran and Ritter (2002) and Lowry and Schwert (2004). Using the most-recent financial statements in the final prospectus, we compute three measures of pre-IPO operating performance: operating income to average assets; net income to average assets; and operating cash flow to average assets. Descriptively each of 2

these measures is strongly positively associated with both the price revision and underpricing, particularly in the tails of the distribution (e.g., whereas IPOs in the lowest decile of operating income, net income or operating cash flow have mean (median) price revisions of 22% (21%) and mean (median) underpricing of 5% (1%); those in the highest decile have mean (median) price revisions of +5% (+8%) and mean (median) underpricing of +22% (+19%)). This suggests an asymmetric association between operating performance and IPO offer price formation, in that downward (upward) price adjustments for IPOs with weak (strong) operating performance are almost full (partial). Within Loughran and Ritters (2002) framework, this is consistent with the view that weak (strong) pre-IPO operating performance represents unfavorable (favorable) public information that engenders weak (strong) demand and motivates issuers to bargain aggressively (passively) with the underwriter over the IPO offer price at the pricing meeting. The positive association between pre-IPO operating performance and offer price revision is robust to controlling for other determinants (e.g., book-building market returns, ownership retention, selling shareholders and whether the issuer is in a high technology industry). Moreover, specification of each of our operating performance variable of interest substantially increases the explained variation in price revision over-and-above that of a baseline estimation. We also adopt an identification strategy to assess whether our results weaken upon substituting older versions of our variables of interest. To do this, we restrict the sample for our offer price revision regressions to those IPOs with both year-end and interim financial statements in their final prospectus. These are issuers for which the year-end statements have gone stale. This occurs, per Securities and Exchange Commission (SEC) rules, when the time between the date of the year-end financial statements and the effective date of the registration statement exceeds 134 days (e.g., for a December 31 year-end issuer, this occurs at the close of business on May 14th). The coefficients on our operating performance variables of interest are smaller and the regression explanatory power is lower when we use older, year-end financial statements in place of more-recent, interim financial statements to calculate our variables of interest.

To refine our test of Brau and Fawcetts (2006) CFO survey response, which specifically references strong historical earnings as a signal of quality, we also parse our continuous preIPO operating performance variables into a series of indicator variables based on decile ranking. Upon regressing price revision on these indicators, we find a near-monotonic increase in the coefficients on these indicator variables of interest as they ascend decile ranks. The association between pre-IPO operating performance and initial returns, while also positive and significant, is much weaker than with the price revision. For example, when we supplement a benchmark underpricing regression, which controls for the price revision, with operating income to assets the adjusted R-squared increases from 39.2% to 40.0%. We conclude that to the extent pre-IPO operating performance influences IPO price formation, it is primarily with respect to the revision from mid-point of initial price range to offer price. To examine why issuers with strong performance seem to acquiesce to a partial upward adjustment of offer price, we follow Loughran and Ritter (2002) and compute the change in preIPO shareholder wealth. Two components comprise this revaluation: the change from mid-point of the initial price range to offer price for the shares insiders sell at the IPO; and the change from mid-point of the initial price range to closing price on the first trading day for the shares that shareholders retain. For issuers in the highest decile of pre-IPO performance, the revaluation in pre-IPO shareholders wealth exceeds money left on the table by several orders of magnitude. Therefore, one explanation for why issuers with strong performance agree to a partial adjustment of the initial price range in response to strong demand is they anchor on the mid-point of the price range and offset the companys loss of proceeds with their gain in wealth from revaluation. Combining with Brau and Fawcetts (2006) CFO survey with Loughran and Ritters (2002) agency / prospect theory of partial adjustment, our findings are consistent with strong (weak) pre-IPO operating performance signaling favorable (unfavorable) public information regarding firm value. In the favorable scenario, underwriters, who prefer to market underpriced shares (Baron 1982; Loughran and Ritter 2002), exploit issuers satisfaction with their positive wealth revaluation by partially adjusting the IPO offer price. Issuers, happy with the increase 4

vis--vis the mid-point of the initial range, acquiesce to this partial adjustment at the pricing meeting. In contrast to this, the unfavorable scenario, issuers bargain aggressively at the pricing meeting and, as such, little money is left on the table. Overall, our paper contributes by providing evidence suggestive of an important role for historical accounting information in the price formation of book-built IPOs. Previous papers focus on the valuation of IPOs, oftentimes by studying subsets of the population, and generally find historical accounting information to be of relatively little importance (e.g., Kim and Ritter 1999; Bartov, Mohanram and Seethamraju 2002; Berger 2002). We extend the study of the importance of accounting information in the context of IPOs by focusing on the price formation, from mid-point of the initial range to offer price to first closing price. II. BACKGROUND AND MOTIVATION In this section, we discuss the literature on partial price adjustment and underpricing of book-built IPOs. Two primary streams comprise this literature: one emphasizes informational issues and book building and another emphasizes agency issues and bargaining incentives. We then discuss the role of accounting information in the valuation and price formation of IPOs. Investors, underwriters and private information One stream focuses on investors and underwriters and concludes that book building can improve pricing accuracy by facilitating the revelation or acquisition of private information. Benveniste and Spindt (1989) model the pre-market interaction between underwriters and regular (e.g., road show) investors as a single-price auction wherein investors bid by indicating non-binding interest at different prices which underwriters use to construct a demand curve to set the price. In contrast to indications of weak demand, which should require little inducement, underwriters keep prices intentionally low to reward investors for truthful revelation of strong demand. Following this, partial offer price adjustment to favorable demand, in concert with preferential allocation of shares, compensates investors for providing private information that

allows the underwriter to more-accurately price the issue. Underpricing therefore results from the partial offer price adjustment necessary to ensure the revelation of strong demand from regular investors is incentive compatible. Among Benveniste and Spindts (1989, p. 353)

implications is that [u]nderpricing is directly related to the level of interest in the premarket.1 Several empirical papers provide results consistent with this dynamic, information-based view of IPO pricing. Hanley (1993) reports a strong, positive relation between the IPO price revision (from mid-point of the initial price range to offer price) and first-day returns. Based on a small, yet detailed sample of international equity issues, Cornelli and Goldreich (2001) find that investors providing bids with both share and price information receive favorable allocations from underwriters. Ljungqvist and Wilhelm (2002) study a large, worldwide sample for which they have share allocation data and conclude the data more strongly support the view that allocations promote price discovery, as opposed to representing discriminatory practices. Issuers, underwriters and public information A second stream focuses on agency issues between issuers and underwriters, such as the formers bargaining incentives or non-price aspects of their objective function. Loughran and Ritter (2002) apply a prospect theory framework (Kahneman and Tversky 1979) and argue that if issuers anchor on the filing range and offset the loss of company proceeds from underpricing primary shares with the positive wealth revaluation on retained or secondary shares, they will acquiesce at the pricing meeting to partial adjustment of the offer price in response to strong demand. Following this focus on the covariance between money left on the table and unexpected wealth changes, if bookbuilding demand is favorable (unfavorable), due to either private or public information, issuers acquiesce (negotiate) at the pricing meeting. In support of this, they show that public information in the form of market returns during the 15

In contrast to the revelation of private information Chemmanur (1993) models the issuers decision to underprice the IPO in order to compensate investors for information production and several papers (Benveniste and Wilhelm (1990); Sherman (2000); Sherman and Titman (2002) model book-building / underpricing as way to incentivize investors to incur the costs of becoming informed (see also Yung 2005).

days pre-IPO are positively associated with both the price revision and initial returns and that this association is stronger when market returns are negative.2 Loughran and Ritter (2002) interpret the asymmetric association between book-building market returns and price revision as consistent with a theory of bargaining, as they assert that issuers will aggressively (passively) bargain over the offer price when roadshow demand is unfavorable (favorable). Habib and Ljungqvist (2001) and Ljungqvist and Wilhelm (2003) posit that underpricing is partly a function of the extent to which owners care about it. These papers focus on the relation between proxies for issuer incentives to bargain for a higher offer price and IPO pricing. For example, Ljungqvist and Wilhelm (2003) examine a sample of domestic IPOs from 1996 to 2001 and conclude that decreases in CEO ownership and insider selling along with an increase in directed-share programs (i.e., allocation of shares to friends and family) explain a large portion of the variation in underpricing during the internet bubble. For a sample of domestic IPOs from 1980-2003, Loughran and Ritter (2004) test three non-mutually exclusive explanations for the time-series variation in underpricing: 1) a change in issuer risk composition (Ritter 1984); 2) realignment of issuer bargaining incentives (Ljungqvist and Wilhelm 2003); and 3) a change in issuer objective function away from maximizing IPO proceeds. They conclude the latter, specifically issuer desire to garner coverage from top stock analysts (analyst lust) and underwriter allocations of hot IPOs to executives of yet-to-go-public companies (spinning), best explains the underpricing during 1999-2000. Of note, subsequent legal and regulatory intervention limits both of these drivers of bubble-period underpricing. Lowry and Schwert (2004) conclude that neither the mid-point of the initial price range nor the IPO price fully reflect public information, which they suggest may stem from an implicit contract between underwriter and issuer to limit revisions. Consistent with prior literature, they document an asymmetric association between book-building market returns and price revision; as the downward price revision to negative returns is almost one-for-one, but the upward price

Bradley and Jordan (2002) also show that initial returns are associated with the initial returns of previous IPOs.

revision to positive returns is much less than this. They also question the significance of publicly available variables prior to disclosure of the initial price range to explain the price revision and conclude the IPO market is almost efficient with respect to public information. Because IPO failure is costly, Edelen and Kadlec (2005) conclude partial adjustment to public information, and its asymmetric response to good and bad news, is partly an artifact of the selection bias inherent in using samples of successful IPOs. They argue that firms proceed with IPOs when positive market responses occur but, to ensure a successful offering and the issuer surplus it entails, only partially adjust price upward; in contrast, when negative market responses occur, because of the costs of withdrawal, firms more-fully adjust price downward. Accounting information and the pricing of IPOs Several papers examine the relation between accounting information in the prospectus and the pricing or valuation of IPOs. In general, this literature documents little role for historical accounting measures of operating performance. Klein (1996) studies the valuation usefulness of prospectus financial statement variables for a sample of 193 IPOs from 1980 to 1991 with positive pre-IPO income. She documents a positive association between the offer price and the market price one week after the offering and both pre-IPO earnings per share and book value per share. Kim and Ritter (1999) study the association between issuer and industry multiples (e.g., price-earnings ratios) for a sample of 190 IPOs from 1992-1993 with positive pre-IPO income. They report positive, albeit statistically weak, associations between issuer and industry multiples (e.g., upon regressing issuer P/E on industry-median P/E, the adjusted-R2 is just 5.0%). Kim and Ritter (1999, page 424) conclude historical accounting numbers are of limited value for understanding IPO valuation and that the performance of the comparable firms approach is surprisingly weak. Bartov, Mohanram and Seethamrau (2002) study of the association between IPO prices and earnings, operating cash flows and sales for samples of 98 Internet IPOs and 98 matched non-Internet IPOs during 1996-1999. Their specification partitions earnings and operating cash

flows by whether they are positive or negative. For Internet IPOs, their findings provide no support for an association between earnings and IPO prices but rather strong evidence that negative operating cash flows are associated with higher offer prices. For non-Internet IPOs, they find offer prices are positively related to earnings and cash flows, but only for issuers for which these variables are non-negative. Akin to Kim and Ritters (1999) conclusion, Berger (2002, page 348) summarizes Bartov et al.s (2002) findings as [t]he results point to a very limited pricing role for the financial statement data contained in the IPO prospectus. A recent paper by Brau and Fawcett (2006) motivates re-visiting the relation between accounting measures of operating performance and IPO pricing. They survey three categories of chief financial officers, those with companies: that went public; that began to go public but withdrew; large enough to go public but have not done so. Among their questions is [w]hat type of signal do the following actions convey to investors regarding the value of a firm going public? (italics in original) All groups of respondents chose having strong historical earnings as the most important positive signal issuers convey to investors regarding the value of a firm going public. We extend the study of the association between public information and IPO price formation, as Loughran and Ritter (2002) theorize, by examining this CFO survey response. III. SAMPLE, VARIABLE SPECIFICATION AND DESCRIPTIVE STATISTICS Sample Panel A of Table 1 presents our sample. Using Thompson Financials SDC database, we begin by identifying 1,826 firm-commitment IPOs by stand-alone (non-carve out) US companies from January 1, 2001 through December 31, 2012. This period covers a dozen, post-IPO bubble years and, for the most part, begins where those of Loughran and Ritter (2002), Ljungqvist and Wilhelm (2003) and Lowry and Schwert (2004) end.3 We focus on share IPOs by non-financial companies by eliminating 790 IPOs by financial companies (i.e., SDC SIC 6xxx; most of which
3

Loughran and Ritters (2002) sample is 19901998; Ljungqvist and Wilhelms (2003) sample is 19962001; and Lowry and Schwerts (2004) primary sample is 19851997 though, for certain analyses, it extends through 1999. As such, our 20012012 sample is least comparable to Ljungqvist and Wilhelms (2003) IPO bubble period sample.

are unit investment trusts), and 113 unit IPOs, because they are mostly small offerings by small companies. We eliminate 71 IPOs without necessary financial statement information in their registration statement, most of which are issuers that do not provide two balance sheets to calculate average assets for the year before going public. Since our interest is price formation of book-built IPOs, we eliminate 15 IPOs sold via auction (Degeorge, Derrien and Womack 2010).4 We also eliminate 7 IPOs for which the time between the date of the registration statement with the initial price range and the IPO date exceeds one year (Edelen and Kadlec 2005) and 6 IPOs with a mid-point of their initial price range of $5 or less. Our final sample consists of 824 IPOs. Variable specification and descriptive statistics Panel B of Table 1 presents descriptive statistics and Table 2 presents correlations for all dependent and independent variables. Mean (median) PriceRevision (change from the midpoint of the initial price range to the IPO offer price), in percentage terms, is 5.2% (0.0%). This average is more negative than the 1.4% Lowry and Schwerts (2004) report for their pre-bubble period sample, and much less than the +5.8% Ljungqvist and Wilhelm (2003) report for their bubble period sample.5 Mean (median) InitialReturn (change from the IPO offer price to the closing price on the first trading day), in percentage terms, is 13.2% (8.3%). This average is similar to Loughran and Ritters (2002) 14.1% and Lowry and Schwerts (2004) 12.3% but, not surprisingly, far below Ljungqvist and Wilhelms (2003) average underpricing of 35.7%. Our three operating performance variables are: OI/Assets (annualized operating income, per the most-recent pre-IPO income statement, divided by average assets), NI/Assets (annualized net income, per the most-recent pre-IPO income statement, divided by average assets) and OCF/Assets (annualized operating cash flow, per the most-recent pre-IPO statement of cash flows, divided by average assets). All of these variables have negative means and positive medians. As might be expected, because of the effects of special items, interest expense and
4 5

See W.R. Hambrechts website at http://www.wrhambrecht.com/ind/auctions/index.html. Loughran and Ritter (2002) do not report descriptive statistics for price revision. However, per their Table 2, because the fraction of their sample with offer prices below the minimum of the initial range exceeds that above the maximum (27.3% and 24.3%, respectively), the average price revision for their sample seems likely negative.

10

income taxes, average (median) OI/Assets is less negative (more positive) than average (median) NI/Assets. Of note, all three of these measures have a considerable amount of dispersion; for example, NI/Assets has a standard deviation of 0.998 around a mean of 0.241. Not surprisingly, this dispersion is particularly evident at the negative tail of each variables distribution.6 In terms of covariates, we specify two spillover variables for public information during book building (Ljungqvist and Wilhelm 2003). The first is MktReturn, the equally-weighted return on all companies in CRSP residing in the issuers Fama and French (1997) industry from the date of the registration statement with the initial price range to IPO date. When specifying our regressions, we allow for the likelihood that positive secondary market returns affect the price revision differently than negative market returns (Loughran and Ritter 2002; Lowry and Schwert 2004; Edelen and Kadlec 2005). The second is IPOReturn, the average initial return for all IPOs during the period from the date of the first registration statement to IPO date.7 We also control for ownership retention and insider selling. The average (median) issuer retains 71.0% (73.5%) ownership (i.e., Retain%, one minus the number of shares sold in the IPO divided by the number of post-IPO shares outstanding). While the majority of our IPOs do not have secondary shares, the average SellingShr% (number of selling shareholder shares divided by number of total shares in the IPO) is 16.7%. Leland and Pyle (1977) theorize that higher values of Retain% and SellingShr% are positive and negative signals, respectively, of firm value to potential investors. In addition, these two variables also proxy for IPO issuer incentives to bargain at the IPO pricing meeting (Loughran and Ritter 2002; Ljungqvist and Wilhelm 2003). Following this, a positive (negative) association between Retain% and PriceRevision is consistent with a signaling (agency) story and a negative (positive) association between SellingShr% and PriceRevision is consistent with a signaling (agency) story.

For example, for Ventrus Biosciences Inc. (a company that went public on December 16, 2010), OI/Assets, NI/Assets and OCF/Assets are 5.802, 21.204 and 14.303, respectively. 7 In specifying IPOReturn, to retain observations, we compile initial returns starting with the date of an issuers first prospectus. If we were to start from the date of an issuers prospectus that discloses the initial price range, we would lose observations because, in numerous instances, no companies went public during this shorter time frame.

11

The motivation for our other covariates (e.g., UW, VC, Proceeds, Age, HighTech, Assets) is extant IPO papers on price revision and initial returns, notably Ljungqvist and Wilhelm (2003) and Lowry and Schwert (2004). Following Lowry and Schwert (2004), we adjust Proceeds and Assets for inflation, converting them to 1983 dollars with the Consumer Price Index. Table 2 shows correlations, Pearson (Spearman) below (above) the diagonal. Each

operating performance measure is positively correlated with PriceRevision and InitialReturn. The measure with the highest Pearson (Spearman) correlation with PriceRevision is OI/Assets (OCF/Assets). Of note, consistent with the dispersion in these measures, Spearman correlations between dependent variables (PriceRevision or InitialReturn) and independent variables of interest (OI/Assets, NI/Assets, OCF/Assets) are more positive than their Pearson counterparts (e.g., the Pearson (Spearman) correlation between PriceRevision and NI/Assets is 0.175 (0.309)). Because of extreme values, particularly in the left tail of the distribution, we winsorize OI/Assets, NI/Assets and OCF/Assets at + / 1% for our regression estimations. Table 3 provides descriptive sorts of our sample by: OI/Assets (panel A), NI/Assets (panel B) and OCF/Assets (panel C). For each panel, we sort the variable of interest by decile and show mean and median values of PriceRevision and InitialReturn. It is interesting to compare the extremes of these sorts. For issuers in Decile 1, IPOs with very negative operating income, net income or operating cash flow, mean (median) PriceRevision ranges from 23.2% to 21.2% (21.8% to 20.0%) and mean (median) InitialReturn ranges from +4.2% to +6.4% (+0.5% to +1.1%). In contrast, for issuers in Decile 10, IPOs with very positive operating income, net income or operating cash flows (i.e., per Brau and Fawcetts survey, with strong historical earnings), mean (median) PriceRevision ranges from +4.6% to +6.1% (+6.7% to +9.7%) and mean (median) InitialReturn ranges from +21.8% to +24.2% (+17.6% to +21.7%). Within the context of Loughran and Ritter (2002), these findings are consistent with the view that weak (strong) pre-IPO operating performance represents unfavorable (favorable) public information that engenders weak (strong) roadshow demand and motivates issuers to bargain aggressively (passively) with the underwriter at the pricing meeting. 12

Taken together, these findings suggest the association between pre-IPO operating performance and IPO price formation is asymmetric. That is, for those issuers with very weak (very strong) performance that go public, the downward (upward) price adjustment is almost full (partial). This asymmetry is akin to that between book-building market returns and the price revision (Loughran and Ritter 2002; Lowry and Schwert 2004; Edelen and Kadlec 2005) in that bad (good) news is nearly fully (partially) associated with downward (upward) price revision. IV. EMPIRICAL ANALYSIS Issuer operating performance and price revision We begin by regressing each measure of pre-IPO operating performance on the IPO price revision.8 These estimations supplement the Table 2 correlations by clustering standard errors by IPO year.9 Given the presence of extreme values among these measures, we impart a winsor of +1% and 1%. Because successful IPOs comprise our sample, the coefficients we report are contingent upon the offering being completed (Loughran and Ritter 2002; Ljungqvist and Wilhelm 2003; and Lowry and Schwert 2004) PriceRevision = !0 + !1OI/Assets + " PriceRevision = !0 + !1NI/Assets + " PriceRevision = !0 + !1OCF/Assets + " Where:
PriceRevision OIAssets NI/Assets OCF/Assets = = = = (IPO price mid-point of initial filing range) mid-point of initial filing range Annualized operating income per most-recent pre-IPO financial statements Average assets Annualized net income per most-recent pre-IPO financial statements Average assets Annualized operating cash flow per most-recent pre-IPO financial statements Average assets (1a) (1b) (1c)

If we take a step back from studying the PriceRevision, and regress the mid-point of the initial price range on our measures of pre-IPO operating performance, we find the coefficient on each of them is strongly positive. When we then split these measures into separate variables depending on whether they are positive or negative, we find that the positive association stems from IPOs with negative OI/Assets, NI/Assets or OCF/Assets (i.e., issuers with poor preIPO operating performance have lower mid-points of their initial price range). Following Brau and Fawcetts (2006) survey response, our analysis focuses on investor reaction to pre-IPO operating performance as opposed to examining the determinants of the initial price range. 9 We do not assume companies that go public during a given time period have pricing residuals that are independent in cross-section. Because of this, for all regression estimations, we cluster standard errors by IPO year.

13

Columns 1 3 of Table 4 panel A report the results of estimating equations (1a), (1b) and (1c). The coefficient for each operating performance measure is positive and highly significant and their specification explains a substantial portion of the variation in PriceRevision. To specify a benchmark to assess the effect of issuer operating performance, we estimate equation (2) by regressing the PriceRevision on determinants from the literature. To control for public information that arises during book building, we follow Ljungqvist and Wilhelm (2003) and Edelin and Kadlec (2005) and specify MktReturn and IPOReturn as spillover, from secondary and primary markets, respectively. With regard to the former, because Loughran and Ritter (2002) and others document an asymmetric revision to positive versus negative market returns, we also specify MktReturn+, which equals MktReturn when it is positive, and zero otherwise. To control for the positive signal issuers convey by ownership retention (Leland and Pyle 1977; Brau and Fawcett 2006) or, alternatively, for lower issuer incentives to bargain for a higher IPO price (Loughran and Ritter 2002), we specify Retain%. To control for the negative signal issuers convey by selling secondary shares or, alternatively, for higher issuer incentives to bargain to increase the offer price, we specify SellingShr% (Ljungqvist and Wilhelm 2003). Following Lowry and Schwert (2004), we specify Ln(Proceeds) and NYSEAMEX as transaction characteristics. To control for effects associated with professional advisors / intermediaries, we specify UW, BigN and VC (Ljungqvist and Wilhelm 2003; Lowry and Schwert 2004; Edelin and Kadlec 2005; and Brau and Fawcett 2006). Lastly, we also specify Ln(Age), HighTech and Ln(Assets) as issuer characteristics (Lowry and Schwert 2004; Ljungqvist and Wilhelm 2003). Overall, equation (2) provides a stringent benchmark against which to compare the inclusion of our operating performance variables of interest in equations (3a), (3b) and (3c). PriceRevision = !0 + !1MktReturn + !2MktReturn+ + !3IPOReturn + !4Retain% + !5SellingShr% + !6UW + !7BigN + !8VC + !9Ln(Proceeds) + !10NYSE/AMEX + !11Ln(Age) + !12HighTech + !13Ln(Assets) + "i,t Where:
PriceRevision = (IPO price mid-point of initial filing range) mid-point of initial filing range

(2)

14

MktReturn MktReturn+ IPOReturn Retain% SellingShr% UW BigN VC Ln(Proceeds) NYSE/AMEX Ln(Age) HighTech Ln(Assets)

= Average return on all companies in CRSP in issuers Fama-French (1997) industry for the period from the date of issuers prospectus with the initial price range to IPO date = MktReturn when it is positive, and zero otherwise = Average initial return of IPOs from the date of issuers first prospectus to IPO date = One less (number of shares sold in IPO number of post-IPO shares outstanding) = Number of shares sold by selling shareholders number of shares sold in IPO = Underwriter rank (Carter, et al., 1998; and Loughran and Ritter 2004) = One if IPO issuer has a BigN audit firm, and zero otherwise = One if IPO issuer has venture capital backing, and zero otherwise = Natural logarithm of IPO proceeds (inflation adjusted to 1983 dollard) per issuers prospectus with the initial price range (i.e., midpoint of initial price range times number of shares filed) = One if IPO is listed on the NYSE or AMEX, and zero otherwise = Natural logarithm of one plus the number of years from year of company founding or incorporation, if founding date is unavailable, to IPO year = One if IPO issuer is a high technology company per SDC, and zero otherwise = Natural logarithm of issuers pre-IPO total assets, in millions (inflation adjusted)

Column 4 of Table 4 panel A reports the results of estimating equation (2).

The

explanatory power, an adjusted R2 of 12.7%, is between the 11% for Lowry and Schwerts (2004) 1985-1997 sample and the 22% for Ljungqvist and Wilhelms (2003) 1996-2000 sample. As for covariates, consistent with the extant literature, the price revision to book-building market returns is more complete when they are negative. MktReturns coefficient of 0.918 implies that a market return during bookbuilding of 10% corresponds to a price revision of 9.18%. In contrast, the coefficient on MktReturn+ of 0.752 suggests a book-building market return of +10% corresponds to a price revision of +1.66% (0.918 0.752).10 Consistent with Habib and Ljungqvist (2001) and Ljungqvist and Wilhelm (2003), the price revision to public information from the primary market and for issuer incentives to bargain for a higher IPO price (IPOReturn and SellingSh%, respectively), are both positive and significant. The coefficient on Retain% is positive and significant, consistent with the view that the equity that entrepreneurs retain signals their private information regarding firm value (Leland and Pyle 1977). As with Ljungqvist and Wilhelm (2003) and Lowry and Schwert (2004), the coefficient on HighTech is positive and significant. Lastly, consistent with its Table 2 correlation, the coefficient on Ln(Assets) is positive and significant, though this association is not robust to specifying our operating performance variables of interest in equations (3a), (3b) and (3c).
10

Edelen and Kadlec (2005) argue that this asymmetry, particularly the strength of the relation between negative market returns and price revision, is largely due to selection bias pertaining to an issuers option to withdraw.

15

We then augment equation (2) by specifying our three pre-IPO operating performance variables in equations (3a), (3b) and (3c). PriceRevision = !0 + !1OI/Assets + !2MktReturn + !3MktReturn+ + !4IPOReturn + !5Retain% + !6SellingShr% + !7UW + !8BigN + !9VC + !10Ln(Proceeds) + !11NYSE/AMEX + !12Ln(Age) + !13HighTech + !14Ln(Assets) + "i,t (3a) PriceRevision = !0 + !1NI/Assets + !2MktReturn + !3MktReturn+ + !4IPOReturn + !5Retain% + !6SellingShr% + !7UW + !8BigN + !9VC + !10Ln(Proceeds) + !11NYSE/AMEX + !12Ln(Age) + !13HighTech + !14Ln(Assets) + "i,t (3b) PriceRevision = !0 + !1OCF/Assets + !2MktReturn + !3MktReturn+ + !4IPOReturn + !5Retain% + !6SellingShr% + !7UW + !8BigN + !9VC + !10Ln(Proceeds) + !11NYSE/AMEX + !12Ln(Age) + !13HighTech + !14Ln(Assets) + "i,t (3c) Columns 5 7 of Table 4 panel A present the results of estimating equations (3a), (3b) and (3c). In each case, the coefficient on the pre-IPO operating performance variable remains positive and significant and their specification substantially increases the explanatory power above that of equation (2) (e.g., specifying OCF/Assets in equation (3c) increases the adjusted R2 from 12.7% for equation (2) to 19.5%).11. As with the univariate regressions, the coefficient on OCF/Assets is the largest and most significant; and, at 0.147, implies a one standard deviation change in OCF/Assets is associated with a 6.8% increase in PriceRevision (0.147 * 0.46012).13 We also adopt an identification strategy to assess whether our results weaken upon substituting older versions of our variables of interest. To do this, we restrict the sample for our price revision regressions to the majority (668 of 824, 81%) of IPOs with both year-end and interim financial statements in their final prospectus. These are issuers with year-end financial statements that have gone stale, meaning the time period between the effective date of the registration statement and financial statements exceeds 134 days (e.g., for a registrant with a
11

We also estimate equations (1a), (1b), (1c), (2), (3a), (3b) and (3c) via ordered probit using, in place of the continuous variable PriceRevision, the five categories of price revision we show in Table 7. The results of these estimations are very similar to those we provide in Table 4. 12 In contrast to the 0.757 in Table 1 panel B, the standard deviation for winsorized OCF/Assets is 0.460. 13 The findings in Table 3 and the positive coefficients on our pre-IPO operating performance variables contrasts with Roosenboom (2007), which finds French IPOs with higher ratios of forecasted earnings before interest and taxes to sales are associated with lower initial IPO price discounts.

16

December 31 year-end, this occurs at the close of business on May 14th). Given the strength of OCF/Assets in Table 4, we table the results of estimating equations (1c), (3c) and (1d), (3d); the latter two specify OCF/AssetsStale, which we compute using the older, year-end statements. PriceRevision = !0 + !1OCF/AssetsStale + "
(1d)

PriceRevision = !0 + !1OCF/AssetsStale + !2MktReturn + !3MktReturn+ + !4IPOReturn + !5Retain% + !6SellingShr% + !7UW + !8BigN + !9VC + !10Ln(Proceeds) + !11NYSE/AMEX + !12Ln(Age) + !13HighTech + !14Ln(Assets) + "i,t (3d) Table 4 panel B reports the results. For both univariate and multivariate estimations, the coefficient on OCF/AssetsStale is smaller than that on OCF/Assets. For the multivariate

regressions, the coefficient on OCF/Assets is 0.150 (column four) whereas on OCF/AssetsStale it is 0.117 (column five); a decrease of 22%. In addition, the regressions R2 decreases from 18.9% to 15.7% upon substituting OCF/AssetsStale in place of OCF/Assets; a decrease of 16%. A Vuong (1989) likelihood ratio test to assess the incremental R2 of Equation (3c) over that of (3d) yields a z-statistic of 1.89, with a p-value of 0.059. These weaker results from specifying a stale version of pre-IPO operating performance in place of the most-recent version provide additional assurance of the positive association between operating performance and the revision from mid-point of the initial price range to IPO offer price. An alternative test of the association between pre-IPO operating performance and price revision is to specify a series of indicator variables using the Table 2 (OI/Assets, NI/Assets and OCF/Assets) decile in which a given IPO resides. In equations (4a), (4b) and (4c), we substitute each variable of interest with a series of nine indicators (the intercept captures Decile 1). This approach combines the descriptive statistics in Table 2 with the regressions in Table 4. PriceRevision = !0 + !1OI/AssetsDecile2 + !2OI/AssetsDecile3 + !3OI/AssetsDecile4 + !4OI/AssetsDecile5 + !5OI/AssetsDecile6 + !6OI/AssetsDecile7 + !7OI/AssetsDecile8 + !8OI/AssetsDecile9 + !9OI/AssetsDecile10 + !10MktReturn + !11MktReturn+ + !12IPOReturn + !13Retain% + !14SellingShr% + !15UW + !16BigN + !17VC + !18Ln(Proceeds) + !19NYSE/AMEX + !20Ln(Age) + !21HighTech + !22Ln(Assets) + "i,t

(4a)

17

PriceRevision = !0 + !1NI/AssetsDecile2 + !2NI/AssetsDecile3 + !3NI/AssetsDecile4 + !4NI/AssetsDecile5 + !5NI/AssetsDecile6 + !6NI/AssetsDecile7 + !7NI/AssetsDecile8 + !8NI/AssetsDecile9 + !9NI/AssetsDecile10 + !10MktReturn + !11MktReturn+ + !12IPOReturn + !13Retain% + !14SellingShr% + !15UW + !16BigN + !17VC + !18Ln(Proceeds) + !19NYSE/AMEX + !20Ln(Age) + !21HighTech + !22Ln(Assets) + "i,t

(4b)

PriceRevision = !0 + !1OCF/AssetsDecile2 + !2OCF/AssetsDecile3 + !3OCF/AssetsDecile4 + !4OCF/AssetsDecile5 + !5OCF/AssetsDecile6 + !6OCF/AssetsDecile7 + !7OCFI/AssetsDecile8 + !8OCF/AssetsDecile9 + !9OCF/AssetsDecile10 + !10MktReturn + !11MktReturn+ + !12IPOReturn + !13Retain% + !14SellingShr% + !15UW + !16BigN + !17VC + !18Ln(Proceeds) + !19NYSE/AMEX + !20Ln(Age) + !21HighTech + !22Ln(Assets) + "i,t (4c) Table 5 reports the results of estimating equation (4a) in panel A, equation (4b) in panel B and equation (4c) in panel C. For presentation purposes, we show the results of the Table 4 panel A regression with the continuous version of each variable of interest (i.e., equations 3a, 3b and 3c). We suppress the control variables results, though they are consistent with Table 4. In general, across all three panels, the coefficients on the operating performance indicator variables increase with decile rank. In addition, consistent with Brau and Fawcetts (2006) CFO survey response that strong historical earnings is the most important signal of quality an IPO issuer can convey, for all estimations the coefficient on OCF/AssetsDecile10 is the most positive. Overall, the results in Table 5 reinforce those in Tables 2, 3 and 4, and provide insight regarding the linearity of the relation between pre-IPO operating performance and the IPO price revision. Issuer operating performance and initial returns In this section, we examine the relation between issuer pre-IPO operating performance and initial returns (i.e., underpricing). As with the price revision regressions, we begin by regressing winsorized versions of each pre-IPO operating performance measure on initial returns. InitialReturn = !0 + !1OI/Assets + " InitialReturn = !0 + !1NI/Assets + " InitalReturn = !0 + !1OCF/Assets + "
(5a) (5b) (5c)

18

Where:
InitialReturn = (Closing price on the first day of trading IPO price) IPO price

Columns 1 3 of Table 6 reports the results of estimating equations (5a), (5b) and (5c). As with the PriceRevision regressions in Table 4 Panel A, he coefficient for each measure of issuer pre-IPO operating performance is positive and significant. However, in contrast to the price revision estimations, the explanatory power of these underpricing regressions is considerably lower. For example, whereas the adjusted R-squared from regressing OCF/Assets on PriceRevision is 12.3%, it is just 4.3% upon regressing OCF/Assets on InitialReturn. To specify a benchmark to assess the effect of issuer pre-IPO operating performance, we estimate equation (6) by regressing the InitialReturn on the covariates in equation (2) plus the price revision. As with regard to the relation between secondary market returns during book building and the price revision, following Ljungqvist and Wilhelm (2003), we allow for an asymmetric relation between the IPO price revision and initial returns. InitialReturn = !0 + !1MktReturn + !2MktReturn+ + !3IPOReturn + !4Retain% + !5SellingShr% + !6UW + !7BigN + !8VC + !9Ln(Proceeds) + !10NYSE/AMEX + !11Ln(Age) + !12HighTech + !13Ln(Assets) + !14PriceRevision + !15PriceRevision+ + "i,t Where:
PriceUpdate PriceUpdate+ = (IPO price mid-point of initial filing range) mid-point of initial filing range = PriceUpdate when it is positive, and zero otherwise

(6)

Column 4 of Table 6 reports the results of estimating equation (6). The explanatory power, an adjusted R2 of 39.3%, is consistent with literature that finds IPO underpricing is predictable (e.g., Bradley and Jordan 2002). The positive coefficient on Retain% is consistent with Leland and Pyles (1977) signaling story and Loughran and Ritters (2002) prediction that IPOs that sell a smaller percentage ownership should be more underpriced.14 The positive coefficients on PriceRevision and PriceRevision+, and that the latter is larger than the former, is consistent with Ljungqvist and Wilhelm (2003). Whereas PriceRevisions coefficient of 0.154 implies an IPO price adjustment of 10% corresponds to underpricing of 1.54%; the coefficient
14

The results in Table 6 are quantitatively very similar if we substitute a measure of overhang (i.e., the ratio of shares retained to shares offered) in place of %Retain (see Bradley and Jordan, 2002).

19

on PriceRevision+ of 0.768 implies an IPO price adjustment of +10% corresponds to underpricing of +9.22% (0.154 + 0.768). We then augment equation (6) by specifying our three pre-IPO operating performance variables of interest in equations (7a), (7b) and (7c). InitialReturn = !0 + !1OI/Assets + !2MktReturn + !3MktReturn+ + !4IPOReturn + !5Retain% + !6SellingShr% + !7UW + !8BigN + !9VC + !10Ln(Proceeds) + !11NYSE/AMEX + !12Ln(Age) + !13HighTech + !14Ln(Assets) + !15PriceRevision + !16PriceRevision+ + "i,t (7a) InitialReturn = !0 + !1NI/Assets + !2MktReturn + !3MktReturn+ + !4IPOReturn + !5Retain% + !6SellingShr% + !7UW + !8BigN + !9VC + !10Ln(Proceeds) + !11NYSE/AMEX + !12Ln(Age) + !13HighTech + !14Ln(Assets) + !15PriceRevision + !16PriceRevision+ + "i,t (7b) InitialReturn = !0 + !1OCF/Assets + !2MktReturn + !3MktReturn+ + !4IPOReturn + !5Retain% + !6SellingShr% + !7UW + !8BigN + !9VC + !10Ln(Proceeds) + !11NYSE/AMEX + !12Ln(Age) + !13HighTech + !14Ln(Assets) + !15PriceRevision + !16PriceRevision+ + "i,t (7c) Columns 5 7 of Table 6 present the results of estimating equations (7a), (7b) and (7c). While the coefficients on OI/Assets, NI/Assets and OCF/Assets remain positive and significant, specifying these variables results in small increases in explanatory power versus the equation (2) benchmark (e.g., specifying OI/Assets in equation (7a) increases the adjusted R-squared from 39.3% for equation (6) to 40.0%). We conclude that to the extent pre-IPO performance

influences IPO price formation, it is primarily with respect to the change from the mid-point of the initial price range to IPO offer price and not from IPO offer price to the first closing price. Why might issuers with strong operating performance go along with a partial adjustment? While our findings are consistent with Brau and Fawcetts (2006) CFO survey response that having strong historical earnings is an important signal of IPO quality to investors, they beg the question of why such issuers seem to acquiesce to a partial upward adjustment of offer price. To examine this, we follow Loughran and Ritter (2002) and compare the amount of money left-on-the-table with the change in wealth for pre-IPO shareholders. Two components 20

comprise this wealth revaluation: the change from mid-point of the initial price range to offer price for secondary shares that shareholders sell at the IPO; plus the change from mid-point of the initial price range to closing price on the first trading day for shares that shareholders retain. Table 7 sorts our sample by decile of pre-IPO operating cash flow to average assets (OCF/Assets).15 In addition to mean and median PriceRevision and InitialReturn (which we repeat from Table 3 panel C), Table 7 shows underwriter rank (UW) and the fraction of IPOs in each decile with an IPO offer price: below the minimum of the initial price range (Below Min); between the minimum and mid-point of the initial price range (Min to Mid); at the mid-point of the initial price range (At Mid); between midpoint and maximum of the initial price range (Mid to Max); and above the maximum of the initial price range (Above Max). Overall, 36.4% and 24.2% of our 20012012 IPOs have offer prices below the minimum and above the maximum of the initial price range, respectively; versus 27.3% and 24.3%, respectively, for Loughran and Ritters (2002) 19901998 IPOs. Lastly, Table 7 also shows the final IPO proceeds (this differs from our Proceeds variable, which is inflation-adjusted proceeds per the initial prospectus), as well as the amount of money left-on-the-table and pre-issue shareholder wealth revaluation. The majority (57.3%) of IPOs in Decile 1 (i.e., lowest pre-IPO operating cash flow to assets) have offer prices below the minimum of the initial price range. On average (median), these IPOs raise $59.3 ($49.1) million, leave just $3.2 ($0.2) million on the table and have revaluations of $28.6 ($29.4) million. In the framework of Loughran and Ritter (2002), this is consistent with issuers aggressively bargaining at the pricing meeting because the wealth losses they suffer leave them unwilling to acquiesce to underpricing. In contrast, the offer price formation is much different for IPOs in Decile 10 (i.e., highest pre-IPO operating cash flow to assets). The majority (56.1%) of these IPOs have offer prices above the maximum of the initial price range. On average (median), these IPOs raise $155.9 ($93.4) million, leave $42.7 ($21.9) million on the table and have revaluations of $222.7 ($94.1)

15

Sorting by OI/Assets and NI/Assets produces results similar to those we provide in Table 7.

21

million (i.e., the revaluation in pre-issue shareholders wealth exceeds the money left on the table by four-to-five orders of magnitude). In the context of Loughran and Ritter (2002), this is consistent with issuers agreeing to a partial price adjustment because the wealth gains they enjoy leave them willing to acquiesce to underpricing. As such, one explanation for why issuers go along with a partial adjustment in response to strong demand is they anchor on the mid-point of the initial price range and offset the companys loss of proceeds with their psychic wealth gain.16 V. SUMMARY In this paper, we extend the study of the association between public information and IPO price formation by examining Brau and Fawcetts (2006) CFO survey response that having strong historical earnings is the most important signal of quality an issuer can convey. For a sample of 20012012 IPOs, we find measures of pre-IPO operating performance explain a substantial portion of the variation in the revision from the mid-point of the initial price range to the offer price. That is, post-bubble, the partial adjustment phenomenon concentrates among issuers with pre-IPO strong performance; whereas for issuers with weak performance, the downward price adjustment is nearly full. As for why issuers with strong performance seem to acquiesce to a partial increase in offer price, these IPOs have the largest wealth gains from shares sold / retained upon going public. Our findings are consistent with Loughran and Ritters (2002) prediction of partial (almost full) adjustment to favorable (unfavorable) public information and suggest an important role for historical accounting information in the pricing of book-built IPOs.

16

The IPOs leaving a lot of money on the table are those where the offer price is revised upward from what had been anticipated at the time of distributing the preliminary prospectus. The offer price is increased in response to indications of strong demand, but it could have been increased even further. Thus at the same time that underpricing is diluting the preissue shareholders of these firms, these shareholders are receiving the good news that their wealth is much higher than they had anticipated We are arguing that when unexpectedly strong demand becomes apparent during the preselling period, issuing firms acquiesce in leaving more money on the table. When demand is unexpectedly weak, issuing firms negotiate more aggressively, leaving little money on the table. (Loughran and Ritter 2002, p. 414, 416)

22

REFERENCES Baron, D. 1982. A model of the demand for investment banking advising and distribution services for new issues. The Journal of Finance 37, 955-976. Bartov, E., Mohanram, P. and C. Seethamraju. 2002. Valuation of Internet stocksAn IPO perspective. Journal of Accounting Research 40, 321-346. Benveniste, L. M. and P. A. Spindt. 1989. How investment bankers determine the offer price and allocation of new issues. Journal of Financial Economics 24, 213-232. Benveniste, L. M. and W. J. Wilhelm. 1990. A comparative analysis of IPO proceeds under alternative regulatory environments. Journal of Financial Economics 28, 173-207. Berger, P. G. 2002. Discussion of Valuation of Internet stocksAn IPO perspective. Journal of Accounting Research 40, 321-346. Bradley, D. and B. Jordan. 2002. Partial adjustment to public information and IPO underpricing. Journal of Financial and Quantitative Analysis 37, 595-616. Brau, J. C. and S. Fawcett. 2006. Initial public offerings: An analysis of theory and practice. The Journal of Finance 61, 399-436. Chemanmanur, T. J. 1993. The pricing of initial public offerings: A dynamic model with information production. The Journal of Finance 48, 285-304. Cornelli, F. and D. Goldreich. 2001. Bookbuilding and strategic allocation. The Journal of Finance 56, 2337-2369. Daniel, K. 2002. Discussion of Why dont issuers get upset about leaving money on the table in IPOs? Review of Financial Studies 15, 445-454. Degeorge, F., Derrien, F. and K. L. Womack 2010. Auctioned IPOs: The US evidence. Journal of Financial Economics 98, 177-194. Edelen, R. M. and G. B. Kadlec. 2005. Issuer surplus and the partial adjustment of IPO prices to public information. Journal of Financial Economics 77, 347-373. Fama, E. F. and K. R. French. 2007. Industry costs of equity. Journal of Financial Economics 43, 153-194. Habib, M. A. and A. P. Ljungqvist. 2001. Underpricing and entrepreneurial wealth losses in IPOs: Theory and Evidence. The Review of Financial Studies 14, 433-458. Hanley, K. W. 1993. The underpricing of initial public offerings and the partial adjustment phenomenon. Journal of Financial Economics 34, 231-250.

23

Kahneman, D. and A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47, 263-291. Kim, M. and J. R. Ritter. 1999. Valuing IPOs. Journal of Financial Economics 53, 409-437. Klein, A. 1996. Can investors use the prospectus to price initial public offerings? The Journal of Financial Statement Analysis 2, 23-39. Leland, H. and D. Pyle. 1977. Informational asymmetries, financial structure and financial intermediation. The Journal of Finance 32, 371-387. Loughran, T. and J. R. Ritter. 2002. Why dont issuers get upset about leaving money on the table in IPOs? Review of Financial Studies 15, 413-443. Loughran, T. and J. R. Ritter. 2004. Why has IPO underpricing changed over time? Financial Management 33, 5-37. Lowry, M. and W. Schwert. 2004. Is the IPO pricing process efficient? Journal of Financial Economics 71, 3-26. Ljungqvist, A. P. and W. J. Wilhelm, Jr. 2002. IPO allocations: Discriminatory or discretionary? Journal of Financial Economics 65, 167-201. Ljungqvist, A. P. and W. J. Wilhelm, Jr. 2003. IPO pricing in the Dot-com bubble. The Journal of Finance 58, 723-752. Ritter, J. R. 1984. The hot issue market of 1980. Journal of Business 57, 215-240. Ritter, J. R. and I. Welch. 2002. A review of IPO activity, pricing, and allocations. The Journal of Finance 57, 1795-1828. Roosenboom, P. 2007. How do underwriters value initial public offerings? An empirical analysis of the French IPO market. Contemporary Accounting Research 24, 1217-1243. Sherman, A. 2000. IPOs and long-term relationships: An advantage of book building. Review of Financial Studies 13, 697-714. Sherman, A. 2005. Global trends in IPO methods: Book building versus auctions with endogenous entry. Journal of Financial Economics 78, 615-649. Sherman, A. and S. Titman. 2002. Building the IPO order book: Underpricing and participation limits with costly information. Journal of Financial Economics 65, 3-29. Vuong, Q. 1989. Likelihood ratio tests for model selection and non-nested hypotheses. Econometrica 57, 307-333. Yung, C. 2005. IPOs with buy- and sell-side information production: The dark side of open sales. Review of Financial Studies 18, 327-347.

24

TABLE 1 Sample and descriptive statistics

Panel A: Sample Firm commitment IPOs by stand-alone domestic companies: January 2001 December 2012 Less: Financial registrants (SIC 6xxx) Unit IPOs Necessary financial statement information not available IPOs issued via auction mechanism IPOs with # days from initial filing range date to IPO date exceeds 365 IPOs with initial filing range mid-point ! $5.00 Sample Panel B: Descriptive Statistics (n = 824) Variable Mean PriceRevision 0.052 InitialReturn 0.132 OI/Assets 0.144 NI/Assets 0.241 OCF/Assets 0.091 MktReturn 0.017 IPOReturn 0.116 Retain% 0.710 SellingShr% 0.167 UW 8.220 BigN 0.859 VC 0.527 Proceeds 82.175 NYSE/AMEX 0.296 Age 18.740 HighTech 0.278 Assets 234.082 1,826 790 113 71 15 7 6 824

Median 0.000 0.083 0.053 0.006 0.049 0.012 0.111 0.735 0.000 9.000 1.000 1.000 44.285 0.000 10.000 0.000 45.413

MidQRange 0.056 0.113 0.071 0.122 0.004 0.012 0.114 0.725 0.141 8.500 1.000 0.500 58.798 0.500 12.750 0.500 92.313

Standard Deviation 0.219 0.193 0.655 0.998 0.757 0.079 0.047 0.139 0.253 1.485 0.348 0.500 182.945 0.457 23.539 0.448 694.186

Variables are as follows: PriceUpdate = (IPO price mid-point of initial filing range) mid-point of initial filing range InitialReturn = (Closing price on first day of trading IPO price) IPO price OIAssets = Annualized operating income per most-recent pre-IPO financial statements Average assets NI/Assets = Annualized net income per most-recent pre-IPO financial statements Average assets OCF/Assets = Annualized operating cash flow per most-recent pre-IPO financial statements Average assets MktReturn = Average return on all companies in CRSP in issuers Fama-French (1997) industry for the period from the date of issuers prospectus with the initial price range to IPO date IPOReturn = Average initial return of IPOs between date of issuers first prospectus and IPO date Retain% = One (number of shares sold in IPO number of post-IPO shares outstanding) SellingShr% = Number of shares sold by selling shareholders number of shares sold in IPO UW = Underwriter rank (Carter, et al., 1998; and Loughran and Ritter 2004) BigN = One if IPO issuer has a Big5 or Big4 audit firm, and zero otherwise VC = One if IPO issuer has venture capital backing, and zero otherwise Proceeds = IPO proceeds per issuers initial prospectus, in millions (inflation adjusted to 1983 dollars), excluding the exercise of overallotment options NYSE/AMEX = One if IPO is listed on the NYSE or AMEX, and zero otherwise Age = Years from founding or incorporation, if founding date is unavailable, to IPO year HighTech = One if IPO issuer is a high technology company per SDC, and zero otherwise Assets = Issuers pre-IPO total assets, in millions (inflation adjusted to 1983 dollars)

25

TABLE 2 Correlations
Price Initial OI/ NI/ OCF/ Revision Return Assets Assets Assets PriceRevision InitialReturn OI/Assets NI/Assets OCF/Assets MktReturn IPOReturn Retain% SellingShr% UWRank BigN VC LnProceeds NYSE/AMEX LnAge HighTech LnAssets 0.529 0.275 0.175 0.238 0.113 0.121 0.113 0.158 0.137 0.047 -0.016 0.117 0.114 0.018 0.212 0.144 0.557 0.291 0.203 0.165 0.120 0.835 0.140 0.808 0.081 -0.008 0.094 -0.039 0.221 -0.056 0.048 0.293 0.142 0.284 0.043 0.054 0.158 -0.229 -0.023 0.326 -0.024 0.188 -0.096 0.296 0.185 0.101 -0.035 0.478 0.309 0.211 0.930 0.904 -0.028 -0.014 -0.008 0.201 0.312 0.116 -0.102 0.277 0.120 0.202 0.077 0.403 0.323 0.221 0.690 0.682 -0.028 -0.007 0.020 0.196 0.258 0.094 -0.103 0.238 0.136 0.168 0.110 0.356 Mkt IPO Selling UW Return Return Retain% Shr% Rank 0.153 0.105 0.122 0.079 0.057 -0.052 0.067 -0.076 0.037 -0.025 0.015 0.083 -0.114 0.092 -0.037 -0.091 -0.115 -0.013 -0.019 -0.011 -0.089 0.112 -0.039 -0.024 0.024 -0.024 -0.029 -0.073 -0.070 0.068 -0.010 -0.033 BigN VC Ln NYSE/ Proceeds AMEX 0.133 -0.000 0.313 0.270 0.255 -0.034 0.001 -0.044 0.314 0.539 0.214 -0.362 0.438 0.317 -0.116 0.827 0.102 -0.013 0.229 0.216 0.193 0.042 -0.041 -0.011 0.193 0.282 -0.005 -0.349 0.476 Ln Age 0.010 -0.045 0.388 0.340 0.227 -0.025 -0.042 -0.188 0.246 0.065 0.022 -0.430 0.301 0.269 High Tech 0.212 0.171 0.058 0.094 0.175 -0.039 0.039 0.207 0.126 0.081 0.064 0.176 -0.144 -0.100 -0.080 -0.132 Ln Assets 0.130 -0.002 0.393 0.363 0.329 -0.013 -0.004 -0.002 0.271 0.449 0.163 -0.453 0.811 0.514 0.397 -0.142

0.142 0.232 0.187 0.057 0.005 0.195 0.137 0.126 0.056 0.124 -0.105 0.437 0.111 0.005 -0.369 -0.045 0.438 0.113 0.013 -0.316 0.016 0.369 0.173 0.060 -0.213 -0.103 -0.026 -0.087 -0.029 -0.095 0.085 -0.092 0.027 0.004 0.110 -0.128 0.204 0.066 0.269 -0.170 0.179 0.033 -0.189 0.089 0.187 0.371 0.066 0.026 0.057 0.473 0.175 0.275 -0.246 0.125 0.175 -0.148 0.335 0.572 0.274 -0.293 -0.063 0.245 0.154 -0.005 -0.349 -0.170 0.240 0.114 0.040 -0.443 0.183 0.046 0.073 0.064 0.176 -0.095 0.104 0.491 0.208 -0.400

0.289 -0.100 -0.120 0.512 0.440

Observations are 824 firm-commitment share IPOs by non-financial, domestic companies from January 1, 2001 to December 31, 2012. See Table 1 for sample details and variable definitions. Pearson (Spearman) correlations are below (above) the diagonal. To accord with our regression specifications, we show correlations for the natural log of Proceeds, Age and Assets. However, in contrast to our regression specifications (for which we winsorize, at +0.5% and 0.5%, our operating performance variables of interest), we show correlations for un-winsorized versions OI/Assets, NI/Assets and OCF/Assets.

26

TABLE 3 IPO price revision and initial return by decile of pre-IPO operating performance measure
Panel A: Decile sort by OI/Assets OI / Price Initial Assets Revision Return 1.581 0.229 0.045 1.306 0.218 0.005 0.619 0.595 0.286 0.291 0.061 0.047 0.027 0.027 0.070 0.070 0.106 0.107 0.150 0.149 0.233 0.232 0.516 0.435 0.144 0.053 0.133 0.077 0.042 0.065 0.062 0.067 0.054 0.068 0.014 0.000 0.003 0.000 0.028 0.000 0.002 0.048 0.050 0.067 0.052 0.000 0.122 0.036 0.138 0.100 0.154 0.063 0.129 0.077 0.093 0.044 0.118 0.087 0.138 0.131 0.164 0.119 0.218 0.188 0.132 0.083 Panel B: Decile sort by NI/Assets NI / Price Initial Assets Revision Return 1.976 0.212 0.064 1.349 0.200 0.011 0.668 0.626 0.325 0.324 0.100 0.092 0.011 0.007 0.018 0.019 0.043 0.041 0.081 0.080 0.142 0.136 0.382 0.306 0.241 0.006 0.135 0.083 0.049 0.000 0.100 0.125 0.050 0.043 0.015 0.000 0.005 0.000 0.006 0.039 0.004 0.000 0.046 0.069 0.052 0.000 0.100 0.020 0.159 0.100 0.106 0.051 0.103 0.033 0.127 0.122 0.135 0.066 0.144 0.121 0.159 0.121 0.223 0.176 0.132 0.083 Panel C: Decile sort by OCF/Assets OCF / Price Initial Assets Revision Return 1.406 0.232 0.042 0.960 0.218 0.005 0.512 0.510 0.185 0.167 0.044 0.043 0.025 0.026 0.068 0.068 0.107 0.105 0.161 0.159 0.257 0.255 0.622 0.498 0.091 0.049 0.147 0.176 0.074 0.073 0.028 0.000 0.046 0.000 0.052 0.037 0.010 0.000 0.024 0.000 0.035 0.053 0.061 0.097 0.052 0.000 0.099 0.035 0.135 0.093 0.146 0.121 0.120 0.064 0.086 0.045 0.155 0.125 0.122 0.096 0.171 0.151 0.242 0.217 0.132 0.083

Decile 1 2 3 4 5 6 7 8 9 10 Total mean median mean median mean median mean median mean median mean median mean median mean median mean median mean median mean median

Observations are 824 firm-commitment share IPOs by non-financial, domestic companies from January 1, 2001 to December 31, 2012. See Table 1 for sample details and variable definitions.

27

TABLE 4 Price revision regressions

Panel A: Full-sample Variable Constant OI/Assets NI/Assets OCF/Assets MktReturn MktReturn+ IPOReturn Retain% SellingShr% UW BigN VC Ln(Proceeds) NYSE/AMEX Ln(Age) HighTech Ln(Assets) Observations Adjusted R
2

Eq 1a

Eq 1b

Eq 1c

Eq 2

Eq 3a

Eq 3b

Eq 3c

0.035 ( 2.77)b 0.130 (10.81)a

0.030 ( 2.37)b

0.040 ( 3.25)a

0.350 ( 4.92)a

0.271 ( 3.84)a 0.123 (6.43)a

0.272 ( 3.64)a

0.272 ( 4.11)a

0.105 (9.50)a 0.167 (14.05)a 0.918 (3.09)a 0.752 ( 2.47)b 0.524 (2.58)b 0.168 (4.01)a 0.112 (4.14)a 0.008 (1.16) 0.008 ( 0.61) 0.001 ( 0.04) 0.008 ( 0.36) 0.024 (1.30) 0.008 ( 1.15) 0.101 (6.84)a 0.017 (2.00)c 824 10.0% 824 7.9% 824 12.3% 824 12.7% 0.916 (3.31)a 0.783 ( 2.57)b 0.544 (2.80)b 0.190 (4.42)a 0.064 (2.02)c 0.001 (0.15) 0.009 (0.69) 0.008 (0.45) 0.014 (0.59) 0.035 (1.80)c 0.016 ( 2.76)b 0.074 (5.14)a 0.007 ( 0.68) 824 18.4%

0.092 (5.58)a 0.147 (11.85)a 0.915 (3.39)a 0.762 ( 2.63)b 0.541 (2.88)b 0.185 (4.08)a 0.077 (2.65)b 0.001 (0.13) 0.004 (0.32) 0.001 (0.04) 0.013 (0.55) 0.036 (1.87)c 0.012 ( 2.01)c 0.081 (6.07)a 0.005 ( 0.55) 824 16.5% 0.924 (3.99)a 0.787 ( 3.06)b 0.532 (2.71)b 0.170 (4.26)a 0.068 (2.73)b 0.002 (0.31) 0.003 (0.24) 0.004 (0.21) 0.012 (0.54) 0.030 (1.48) 0.012 ( 1.90)c 0.069 (5.10)a 0.006 ( 0.65) 824 19.5%

Observations are 824 firm-commitment share IPOs by non-financial, domestic companies from January 1, 2001 to December 31, 2012. The dependent variable is PriceRevision. In contrast to Tables 1, 2 and 3, OI/Assets, NI/Assets and OCF/Assets are winsorized at + / 1%. MktReturn+ is MktReturn when positive and zero otherwise. See Table 1 for sample details and other variable definitions. OLS estimation and t-statistics with robust standard errors clustered by IPO year in parentheses. a,b,c Significant at or beyond the 1%, 5% and 10% levels, respectively (two-sided tests).

28

TABLE 4 Price revision regressions

Panel B: Sub-sample of IPOs with interim financial statements Variable Eq 1c Eq 1d 0.041 0.041 Constant ( 2.74)b ( 2.73)b OCF/Assets OCF/AssetsStale MktReturn MktReturn+ IPOReturn Retain% SellingShr% UW BigN VC Ln(Proceeds) NYSE/AMEX Ln(Age) HighTech Ln(Assets) Observations Adjusted R
2

Eq 2

Eq 3c

Eq 3d

0.365 ( 5.29)a

0.269 ( 4.02)a 0.150 (9.30)a

0.274 ( 3.89)a

0.161 (9.64)a 0.129 (8.96)a 0.814 (2.59)b 0.629 ( 2.35)b 0.541 (2.76)b 0.166 (3.95)a 0.139 (4.99)a 0.007 (0.98) 0.001 (0.04) 0.003 (0.11) 0.001 ( 0.04) 0.017 (0.80) 0.006 ( 0.75) 0.084 (5.49)a 0.012 (1.27) 668 12.4% 668 8.6% 668 11.2%

0.117 (7.44)a 0.799 (3.11)a 0.648 ( 2.88)b 0.548 (2.81)b 0.167 (4.43)a 0.093 (3.55)a 0.001 (0.11) 0.011 (0.82) 0.006 (0.24) 0.020 (0.95) 0.028 (1.16) 0.011 ( 1.39) 0.052 (3.30)a 0.013 ( 1.90)c 668 18.9% 0.814 (2.84)b 0.640 ( 2.59)b 0.563 (2.78)b 0.175 (4.70)a 0.096 (3.52)a 0.000 ( 0.06) 0.018 (1.21) 0.004 (0.15) 0.016 (0.78) 0.025 (1.05) 0.014 ( 1.93)c 0.059 (3.43)a 0.008 ( 0.99) 668 15.7%

Observations are 668 firm-commitment share IPOs by non-financial, domestic companies from January 1, 2001 to December 31, 2012 with interim financial statements in the final prospectus (i.e., the audited financial statements in the final prospectus are stale). The dependent variable is PriceRevision. OCF/AssetsStale is annualized operating cash flows from the audited financial statements average assets. In contrast to Tables 1, 2 and 3, OCF/Assets and OCF/Assets-Stale are winsorized at + / 1%. MktReturn+ is MktReturn when positive and zero otherwise. See Table 1 for sample details and other variable definitions. OLS estimation and t-statistics with robust standard errors clustered by IPO year in parentheses. A Vuong (1989) likelihood ratio test to assess the incremental R2 of Equation (3c) over that of (3d) yields a z-statistic of 1.89, with a p-value of 0.059. a,b,c Significant at or beyond the 1%, 5% and 10% levels, respectively (two-sided tests).

29

TABLE 5 Price revision regressions pre-IPO operating performance measure by decile ranking
Panel A: OI/Assets Variable Constant OI/Assets OI/AssetsDecile2 OI/AssetsDecile3 OI/AssetsDecile4 OI/AssetsDecile5 OI/AssetsDecile6 OI/AssetsDecile7 OI/AssetsDecile8 OI/AssetsDecile9 OI/AssetsDecile10 Control variables Observations Adjusted R
2

Panel B: NI/Assets
Eq 3b Eq 4b

Panel C: OCF/Assets
Eq 3c Eq 4c

Eq 3a

Eq 4a

0.271 ( 3.84)a 0.123 (6.43)a

0.457 ( 6.85)a

Constant NI/Assets

0.272 ( 3.64)a 0.092 (5.58)a

0.453 ( 6.71)a

Constant OCF/Assets

0.272 ( 4.11)a 0.147 (11.85)a

0.453 ( 6.51)a

0.088 (2.25)b 0.160 (5.06)a 0.135 (3.25)a 0.168 (6.16)a 0.209 (6.24)a 0.230 (8.10)a 0.214 (6.81)a 0.208 (6.15)a 0.265 (6.22)a Yes 824 18.4% Yes 824 19.2%

NI/AssetsDecile2 NI/AssetsDecile3 NI/AssetsDecile4 NI/AssetsDecile5 NI/AssetsDecile6 NI/AssetsDecile7 NI/AssetsDecile8 NI/AssetsDecile9 NI/AssetsDecile10 Control variables Observations Adjusted R
2

0.064 (1.64) 0.135 (4.84)a 0.087 (2.21)b 0.149 (6.29)a 0.186 (7.05)a 0.191 (6.08)a 0.223 (7.41)a 0.179 (5.69)a 0.226 (4.68)a Yes 824 16.5% Yes 824 18.8%

OCF/AssetsDecile2 OCF/AssetsDecile3 OCF/AssetsDecile4 OCF/AssetsDecile5 OCF/AssetsDecile6 OCF/AssetsDecile7 OCF/AssetsDecile8 OCF/AssetsDecile9 OCF/AssetsDecile10 Control variables Observations Adjusted R
2

0.082 (2.47)b 0.136 (4.68)a 0.192 (5.23)a 0.167 (5.16)a 0.167 (4.54)a 0.204 (5.03)a 0.181 (5.99)a 0.237 (8.00)a 0.250 (9.30)a Yes 824 19.5% Yes 824 19.6%

Observations are 824 firm-commitment share IPOs by non-financial, domestic companies from January 1, 2001 to December 31, 2012. The dependent variable is PriceRevision. In contrast to Tables 1, 2 and 3, OI/Assets, NI/Assets and OCF/Assets are winsorized at + / 1%. For each operating performance variable (OI/Assets, NI/Assets and OCF/Assets), we specify indicator variables for whether the IPO sorts into a given decile in Table 3 (e.g., OI/Assets-Decile2 equals one if an IPO is in the second decile of OI/Assets in Table 3). Control variables are as in Table 4. See Table 1 for sample details and other variable definitions. OLS estimation and t-statistics with robust standard errors clustered by IPO year in parentheses. a,b,c Significant at or beyond the 1%, 5% and 10% levels, respectively (two-sided tests).

30

TABLE 6 Initial returns regressions

Variable Constant OI/Assets NI/Assets OCF/Assets MktReturn MktReturn+ IPOReturn Retain% SellingShr% UW BigN VC Ln(Proceeds) NYSE/AMEX Ln(Age) HighTech Ln(Assets) PriceRevision PriceRevision+ Observations Adjusted R
2

Eq 5a

Eq 5b

Eq 5c

Eq 6

Eq 7a

Eq 7b

Eq 7c

0.140 (15.52)a 0.064 (9.96)a

0.144 (16.40)a

0.138 (15.23)a

0.048 ( 0.76)

0.029 ( 0.44) 0.041 (2.80)b

0.024 ( 0.36)

0.035 ( 0.51)

0.056 (10.45)a 0.088 (8.70)a 0.182 (1.05) 0.077 ( 0.42) 0.069 (0.62) 0.128 (3.78)a 0.031 (1.30) 0.015 (2.10)c 0.029 ( 1.59) 0.018 (1.20) 0.015 ( 1.34) 0.006 ( 0.32) 0.000 (0.04) 0.008 (0.48) 0.003 ( 0.32) 0.154 (3.54)a 0.768 (4.84)a 824 39.3% 0.202 (1.14) 0.104 ( 0.53) 0.087 (0.83) 0.139 (4.14)a 0.017 (0.65) 0.013 (1.77) 0.024 ( 1.31) 0.021 (1.37) 0.008 ( 0.68) 0.002 ( 0.11) 0.003 ( 0.51) 0.001 (0.05) 0.010 ( 1.10) 0.131 (3.16)a 0.769 (5.00)a 824 40.0%

0.035 (2.90)b 0.038 (2.08)c 0.203 (1.21) 0.102 ( 0.56) 0.082 (0.75) 0.133 (3.95)a 0.021 (0.84) 0.014 (1.85)c 0.027 ( 1.48) 0.020 (1.29) 0.010 ( 0.86) 0.004 ( 0.21) 0.001 ( 0.18) 0.001 (0.08) 0.008 ( 0.88) 0.134 (3.38)a 0.766 (4.92)a 824 39.8%

824 3.0%

824 2.9%

824 4.3%

0.197 (1.14) 0.094 ( 0.50) 0.084 (0.78) 0.138 (4.08)a 0.019 (0.77) 0.012 (1.72) 0.025 ( 1.39) 0.019 (1.24) 0.007 ( 0.60) 0.001 ( 0.05) 0.002 ( 0.31) 0.002 (0.11) 0.011 ( 1.15) 0.138 (3.32)a 0.765 (4.98)a 824 39.9%

Observations are 824 firm-commitment share IPOs by non-financial, domestic companies from January 1, 2001 to December 31, 2012. The dependent variable is InitialReturn. In contrast to Tables 1, 2 and 3, OI/Assets, NI/Assets and OCF/Assets are winsorized at + / 1%. MktReturn+ is MktReturn when positive and zero otherwise. PriceRevision+ is PriceRevision when positive and zero otherwise. See Table 1 for sample details and other variable definitions. OLS estimation and t-statistics with robust standard errors clustered by IPO year in parentheses. a,b,c Significant at or beyond the 1%, 5% and 10% levels, respectively (two-sided tests).

31

TABLE 7 IPO price revision, initial return, money left on the table and revaluation by decile of pre-IPO operating cash flow to assets
OCF/ Assets 1.406 0.960 0.512 0.510 0.185 0.167 0.044 0.043 0.025 0.026 0.068 0.068 0.107 0.105 0.161 0.159 0.257 0.255 0.622 0.498 0.144 0.053 Min Below to Min Mid 0.573 0.195 0.506 0.451 0.349 0.354 0.390 0.301 0.317 0.229 0.171 0.364 0.121 0.085 0.096 0.134 0.134 0.121 0.110 0.072 0.134 0.120 At Mid 0.134 0.157 0.061 0.121 0.122 0.159 0.084 0.195 0.157 0.061 0.125 Mid to Above Price Max Max Revision 0.049 0.049 0.232 0.218 0.096 0.120 0.147 0.176 0.220 0.183 0.074 0.073 0.133 0.301 0.028 0.000 0.207 0.183 0.046 0.000 0.171 0.146 0.052 0.037 0.169 0.325 0.010 0.000 0.183 0.195 0.024 0.000 0.193 0.349 0.035 0.053 0.073 0.561 0.061 0.097 0.149 0.242 0.052 0.000 Initial Return 0.042 0.005 0.098 0.035 0.135 0.093 0.146 0.121 0.120 0.064 0.086 0.045 0.155 0.125 0.122 0.096 0.171 0.151 0.242 0.217 0.132 0.083 Final IPO Proceeds 59.281 49.050 69.571 55.000 114.357 80.000 115.779 93.750 230.580 146.205 244.683 124.500 212.875 140.625 188.949 113.250 346.182 96.000 155.897 93.424 173.875 91.000 Money left on table Revaluation 3.192 28.611 0.163 29.420 10.629 15.599 1.225 23.549 12.216 17.241 6.833 8.492 17.559 64.123 10.000 9.771 25.018 54.879 6.994 6.074 13.545 6.346 5.190 0.986 33.865 161.779 14.188 37.538 25.189 186.585 11.387 17.471 29.180 320.799 11.550 29.332 42.740 222.670 21.859 94.079 21.321 101.065 7.350 4.838 Revaluation minus Money left on table 31.803 29.922 4.970 24.591 5.025 1.595 46.564 5.797 29.861 1.526 19.891 1.189 127.914 21.829 161.396 8.528 291.619 17.809 179.930 69.905 79.744 0.264

Decile 1 2 3 4 5 6 7 8 9 10 Total mean median mean median mean median mean median mean median mean median mean median mean median mean median mean median mean median

UW 7.146 8.000 7.801 8.500 8.317 9.000 8.175 9.000 8.439 9.000 8.378 9.000 8.572 9.000 8.750 9.000 8.416 9.000 8.201 9.000 8.220 9.000

Observations are 824 firm-commitment share IPOs by non-financial, domestic companies from January 1, 2001 to December 31, 2012. Below Min, Min to Mid, At Mid, Mid to Max and Above Max are the fraction of IPOs with an offer price below the minimum of the initial price range, between the minimum and mid-point of the initial price range, at the mid-point of the initial price range, between the mid-point and the maximum of the initial price range and above the maximum of the initial price range, respectively. Final IPO Proceeds are proceeds ($millions) per final prospectus. Money left on table is the first-day closing price minus the offer price times number of IPO shares issued ($millions). Revaluation is (the first-day closing price minus the mid-point of the initial price range) times number of shares retained by pre-IPO shareholders plus (the offer price minus the mid-point of the initial price range) times number of shares sold by selling shareholders ($millions). See Table 1 for sample details and variable definitions.

32