The Opening Price Performance of Initial Public Offerings of Common Stock

Initial public offerings (IPOs) of common stock are followed in the immediate after market by sizeable increases in stock prices on average. The large initial returns of IPO shares have attracted a great deal of attention in the empirical and theoretical literature of finance, and IPOs are said to be "underpriced" because of their large initial returns. The dominant explanations of the underpricing phenomenon suggest that the initial returns should be earned by purchasers who buy shares in the initial offering rather than those who buy shares in the aftermarket. Since many shares experience a great deal of trading activity during their first day of trading, and since observers have noted that many purchasers almost immediately "flip" (i.e., resell) their shares, it is not obvious who gains from the underpricing of the IPOs. We resolve that issue by examining opening price data in contrast to the closing price data on which previous studies have been based. We examine 175 operating company IPOs and 54 closed-end fund IPOs over the two-year period from December 1988 through December 1990. We contrast the returns based on the offering price to the first day's closing price against the returns based on the offering price to the price of the first transaction of the day, and we also examine the intraday price on the first day of trades.