IPO pricing mechanisms in Norway

Abstract

In this paper, we have analysed 166 book-building and fixed-price IPOs listed on the Oslo Stock Exchange in 1993-2008 and compared the efficiency of two pricing mechanisms used in them (in terms of level and variability of underpricing, and the ability to fully incorporate market conditions in the pre-offering period into the final offer price). After having controlled for firm, issue characteristics and market conditions in the period prior to an IPO, we have found that the book-building mechanism is associated with 5.2% significantly lower underpricing. It has also been found that book-building is less sensitive to market conditions prior to an IPO. Yet, both pricing mechanisms have the similar variability of underpricing, i.e. accuracy of pricing. All things considered, we conclude that book-building (vs. fixed-price) is a more efficient pricing mechanism in the Norwegian IPO market, as it underprices less, and more effectively incorporates market conditions in the pre-offering period into the final offer price. Thus, after controlling for all the other possible objectives of an IPO, different from pricing issues (e.g. allocation), book-building is a more rational pricing mechanism choice for Norwegian firms going public.