Do Underwriters Price-Up IPOs to Prevent Withdrawal?

We examine whether underwriters price-up weakly demanded IPOs to prevent issuers from withdrawing their offering. Our empirical strategy exploits a discontinuity in the distribution of IPO prices around the low boundary of the preliminary filing range. We identify offerings with a high ex-ante withdrawal probability that are priced exactly at the low boundary as those that were likely aggressively priced to meet issuers’ reservation prices, and compare their aftermarket returns to offerings that also faced weak premarket demand but whose reservation price was likely not binding. We find a negative 8.4-percentage point differential effect on aftermarket returns attributable to the systematic aggressive pricing inherent in setting the offer price exactly at the low boundary when the risk of withdrawal is high.