Does the Initial Pricing Range Estimate Matter for Information Production and IPO Pricing?

Securities Exchange Commission (SEC) rules require issuers in initial public offerings (IPOs) to submit a pricing range estimate, usually weeks before IPO pricing. Using the SEC fee calculation decision as a novel proxy, this paper provides evidence that issuers pursue heterogeneous pricing range estimate strategies. Some issuers overestimate the pricing range, as if they’re running a Dutch auction, while others underestimate the pricing range, as if they’re running an English auction. Consistent with the robust partial adjustment empirical result, an underestimation strategy is associated with six percentage points greater IPO underpricing than an overestimation strategy, or more than $15 million of foregone IPO proceeds in an IPO with average proceeds. The results are not predicted by leading information-based explanations for IPO underpricing. These results may occur if some, but not all, issuers prefer IPO underpricing, or if underwriters steer some, but not all, issuers into underestimated pricing range estimates, consistent with agency theory. (JEL K20, G10, G20, G41)