An investigation of the partial adjustment effect of Brazilian IPOs

Abstract

Initial public offer (IPO) is an alternative for companies to finance investments, for families to sell part or the total of their stake, and for private equity to exit. Although bookbuilding process reduces information asymetry and underpricing in IPOs, global literature reports positive first day return. When the underwriter perceives high demand, he or she adjusts upward the offer price, but not the full fair price. This partial adjustment creates positive first day return, which is used to compensate informed investors for revealing truthful information during the pre deal period. We investigate Brazilian IPOs issued between 2004 and 2012 and find evidence of partial adjustment in Brazil. Pre-deal information predicts both, underpricing and the exercise of greenshoe option.