Advertising and the IPO Price Revision Process
(A2025-124830)

AUTHORS

Yi-Lin Tsai, University of Melbourne; Michal Herzenstein, University of Delaware; Tzachi Zach, Ohio State University; Dan Horsky, University of Rochester

ABSTRACT

We investigate how the intensity of product advertising just before an Initial Public Offering (IPO) impacts the change in the offer price between the initial price stated in the prospectus and the final price. An IPO is a crucial event for firms to raise substantial funds, so the proceeds determined by the offer price are extremely important. The offer price gets set through negotiations among the issuing firm, underwriters, and institutional investors, reflecting the firm's valuation and expected aftermarket share price. Analyzing data on 2,038 IPOs while mitigating endogeneity concerns, we find that an increase in advertising spending in the months leading up to the IPO is associated with an upward revision in the offer price. This effect is more pronounced for business-to-business issuers with lower consumer awareness. The proposed mechanism is that increased advertising drives higher retail investor participation on the first trading day, signaling greater awareness and demand that underwriters account for by negotiating higher offer prices. Lastly, we discuss factors that discourage issuers from taking undue advantage of this positive relationship.