Pre-Opening Auctions and Price Discovery in Initial Public Offerings

Using a proprietary dataset comprising of 937,663 quotes for 97 IPO firms we examine the preopening trading activities of investors in newly listed firms during the one-hour preopening auction on the listing day on Bombay Stock Exchange. We find that significant price discovery takes place during the auction. We document a positive relationship between the offer-to-first quote return and IPO underpricing. Our results suggest that retail investors’ net buying is positively related to pre-market sentiment while that of institutional investors is positively related to after-market sentiment. We also find that illiquidity reduces after the introduction of pre-opening auction