Journal of Banking & Finance 25 (2001) 1543±1551

www.elsevier.com/locate/econbase

Do investors prefer round stock prices?

Evidence from Israeli IPO auctions
a,b,1 b,c,* a
Shmuel Kandel , Oded Sarig , Avi Wohl
a
Faculty of Management, Tel Aviv University, Tel Aviv 69978, Israel
b
The Wharton School, University of Pennsylvania, PA, USA
c
Arison School of Business, IDC, Herzlia, Israel
Received 18 October 1999; accepted 11 May 2000

Abstract

We ®nd round number clustering in orders submitted by investors in Israeli IPO

auctions. Explanations o€ered for price clustering, such as dealer collusion or implicit
agreement to simplify negotiations, cannot explain price clustering in this market.
Therefore, this is direct evidence that investors prefer round numbers. Ó 2001 Elsevier
Science B.V. All rights reserved.

JEL classi®cation: D44; D49; G12

Keywords: Price clustering; Round numbers; IPO; Auctions

1. Introduction

Recent empirical evidence indicates that not all prices are created equal:
round prices appear to be used more often than non-round prices in several
markets. A partial list of research documenting price rounding includes the

*
Corresponding author. Tel.: +972-3-640-8216; fax: +972-3-640-6330.
E-mail addresses: kandel@post.tau.ac.il (S. Kandel); sarigo@post.tau.ac.il (O. Sarig);
aviwohl@post.tau.ac.il (A. Wohl).
1
Tel.: +972-3-640-8720; fax: +972-3-640-9560.

0378-4266/01/$ - see front matter Ó 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 8 - 4 2 6 6 ( 0 0 ) 0 0 1 3 1 - X
1544 S. Kandel et al. / Journal of Banking & Finance 25 (2001) 1543±1551

following. Neiderho€er (1965, 1966), Neiderho€er and Osborne (1966), Harris

(1991) and others show that it is more common for stock prices to end with
integers than with halves, which are more common than stock with quarters or
odd eighths. Ball et al. (1985) document price clustering in LondonÕs gold
market, with the extent of clustering positively correlated with the level of
information investors have. Goodhart and Currio (1990) report decimal price
clustering in foreign exchange markets. Grossman et al. (1995) summarize the
evidence on price clustering in these and other markets.
Several explanations for the observed price clustering have been suggested.
Harris (1991) and Grossman et al. (1995) argue that price clustering re¯ects
implicit agreement to restrict price negotiations to a subset of possible prices.
Such a restriction, they argue, accelerates and simpli®es negotiations and
lowers negotiation costs. Christie and Schultz (1994) hypothesize that price
clustering in stock markets re¯ects dealer collusion intended to maintain wider
bid±ask spreads than would prevail under full competition, an argument fur-
ther developed by Godek (1996), Kandel and Marx (1997) and others. Kahn et
al. (1999) propose that sellers take advantage of ``memory-economizing'' in-
dividuals who truncate observed prices rather than remember the full price (or
®rst round the price and then remember it). Kahn et al. (1999) show that,
similar to prices in other markets in which sellers post prices, observed bank
deposit rates comply with their theory of limited recall. 2
In this paper, we examine the use of round prices in a setting that allows us
to check whether the explanations suggested for deliberate price clustering ±
simplifying negotiations, collusive market making or limited recall ± are ex-
clusively responsible for the observed price clustering. Speci®cally, prior studies
have examined prices that are either negotiated or unilaterally set by either
market makers or sellers. In these markets, simpli®cation of negotiations or
exploitation of buyers may be valid explanations for price clustering. We, on
the other hand, examine prices in limit orders submitted in auctions for newly
issued stocks (IPOs). Since the orders we examine are directly submitted to the
stock issuers by thousands of investors, these transactions involve no negoti-
ations, so that negotiation simpli®cation is not a valid explanation for price
clustering in our data. Moreover, since neither market makers nor sellers
specify the prices of the orders, strategic behavior of market makers or sellers
cannot explain the use of round prices in these orders. Rather, if round prices
are prevalent in this market, this re¯ects nothing but investor tendency to trade
in round numbers.
Starting December 1993, IPOs in Israel were conducted as non-discrimi-
natory auctions. Unlike in the USA and many other countries, prices in these

2
Ho€man and Marsden (1986) show a related phenomenon ± price discreteness (that is not
necessarily at round prices) in bids for o€shore oil leases.
 S. Kandel et al. / Journal of Banking & Finance 25 (2001) 1543±1551 1545

IPOs were not predetermined and the IPO auctions were ocially and prac-
tically open to the public at large. In these auctioned IPOs, the underwriters
announce a minimum price (which is usually substantially lower than the pre-
IPO estimated value of the shares and the eventual auction price) and the
number of newly issued stocks. On the IPO day, investors submit multiple limit
buy orders. The auctioned IPO price is determined as the highest price at which
demand at least equals the predetermined supply.
Parenthetically, it is worth mentioning that the auctioned IPOs proved to be
an ecient mechanism for ¯oating shares in at least two dimensions. First,
many investors got access to the o€ered shares: the average number of bidders
in the auctioned IPOs was over 4,000. Second, the pricing in the IPOs was
higher than the pricing in non-auctioned IPOs: the underpricing in the auc-
tioned IPOs relative to the closing price on the ®rst trading day was only 4% on
average. The 4% average under-pricing is much smaller than the almost 20%
under-pricing on non-auctioned Israeli IPOs and roughly the same under-
pricing in non-auctioned US IPOs. 3
We examine 27 out of 28 Israeli IPOs in the period December 1993 through
February 1994 for which complete order data are available. We look for price
clustering in the limit orders in these auctioned IPOs. We ®nd that investors
are twice as likely to use round prices (i.e., prices that end with 0), in their
limit orders, than non-round prices. In other words, we ®nd price clustering at
round numbers that is not caused by a convention to ease negotiations or by
strategic behavior of market makers or sellers. It must be emphasized that
these ®ndings do not contradict the explanations cited above for price
clustering. Rather, we provide evidence for a complementary explanation ±
that investors are simply inclined to use round numbers than non-round
numbers.
The paper is organized as follows. In Section 2, we describe the data. In
Section 3, we present the results. In Section 4, we o€er some concluding re-
marks.

2. Data

In the sample period, December 1993±February 1994, IPOs in Israel were

conducted as uniform-price auctions. For each issuer, the o€ering prospectus
speci®ed the number of units to be issued, the types and number of securities
included in each auctioned unit (e.g., 10 shares and three warrants) and a
minimum price. In all auctions, the minimum price was much lower than the
eventual clearing price.

3
For more details about these IPOs, see Kandel et al. (1999).
1546 S. Kandel et al. / Journal of Banking & Finance 25 (2001) 1543±1551

Investors could submit orders (single or multiple) at the minimum price or at

prices that exceeded the minimum by increments of one new Israeli shekel
(NIS) ± approximately 1/3 $US. This tick size represents a small fraction of the
auction price, which averaged NIS 180.2: one NIS equals anywhere from 0.17%
to 2.86% of the auction price in the sample.
Each investor could submit multiple limit orders, each specifying a desired
quantity at a given price. The average number of orders in an auction was
4,077, with a minimum of 1,388. The lead underwriter summed all limit orders
and computed the auction price as the highest price at which aggregate demand
at least equaled supply. All transactions were executed at that price. If, at the
auction price, the demand was greater than the supply, the orders at exactly the
auction price were prorated to fully sell the IPO.
The demand schedules of these IPOs are not published. However, we ob-
tained, from the underwriters, 27 out of the 28 demand schedules of the auc-
tioned IPOs conducted in the sample period. 4 For each auction, we obtained
the aggregate number of units requested at every price. To study the prefer-
ences of investors for round number prices, for each auction i; i ˆ 1; . . . ; 27,
and for each last digit j; j ˆ 0; . . . ; 9, we compute Dij ± the total unit demand
at prices ending with this digit. Since investors do not determine the minimum
price, we do not include the demand at the minimum in computing Dij . 5 We
then compute the relative demand P in auction i at prices that end with the digit j,
denoted by Rij , as Dij divided by j Dij (i.e., Rij is the percentage of the total
demand in auction i at prices that end with the digit j). The distribution of Rij is
the subject of our analysis. Our null hypothesis is that investors are no more
inclined to use round prices than to use non-round prices. If investors are in-
deed equally likely to use all prices, Rij should be distributed around 10% for
all i and j. If, on the other hand, investors prefer round prices, Ri0 should
exceed 10% and should be less than 10% for non-round prices.

3. Results

In Fig. 1, we present the average, across all auctions, of the relative demand
by the last digit of the order price. The high relative appearance of prices that
end with a zero or a ®ve is apparent. The average of Ri0 across all auctions is
20.8%, which means that 20.8% of the demanded quantity is at prices that end
with a zero. This fraction is 6.0 standard errors away from the expected

4
The underwriter of one IPO has lost the records of the order quantities and prices of the
auction.
5
The results do not change materially if we do include the demand at the minimum price in our
calculations.
 S. Kandel et al. / Journal of Banking & Finance 25 (2001) 1543±1551 1547

Fig. 1. Average relative demand at round and non-round prices.

fraction under the null hypothesis ± 10%. The average of Ri5 is 15.1% and is 2.8
standard errors away from 10%. These di€erences are signi®cant at commonly
used levels, indicating signi®cant investor inclination to use round numbers.
Another indication for investorsÕ over-use of round numbers is that Ri0 is
greater than 10% in 24 out of the 27 auctioned IPOs. To examine the signi®-
cance of the prevalence of high demand at round prices in the auctions, we use
a non-parametric test based on the null hypothesis that observing an Ri;j either
above or below 10% is equally likely. We can reject this null hypothesis for Ri0
at a signi®cance level of less than 0.1%. Similarly, Ri5 is greater than 10% in 18
out of the 27 auctioned IPOs, which is also signi®cantly di€erent from the
expected number of occurrences if it is equally likely that Ri5 be above or below
10% (one-sided p-value of 0.06).
So far, we treated numbers that end with a ®ve as ``equally attractive'' to
investors as numbers that end with a zero. Zeros, however, appear to be more
attractive than ®ves: the average di€erence Rj0 Rj5 is 5.4% and it is 2.4
standard errors away from zero. Therefore, investor demand at prices that end
with a zero is signi®cantly higher than demand at prices that end with a ®ve
(which is signi®cantly higher than demand at non-round prices).
To further test the joint hypotheses of investor preference for round num-
bers, we follow Ball et al. (1985) in estimating the following regression equa-
tion:

Rij ˆ a0 ‡ a1 I5 ‡ a2 I0 ‡ ij ; …1†

where I5 is a dummy variable that equals 1 if the last digit is divisible by ®ve
(i.e., it is either 5 or 0) and equals 0 otherwise and I0 is a dummy variable that
equals 1 only if the last digit is zero and equals 0 otherwise. We modify the Ball
1548 S. Kandel et al. / Journal of Banking & Finance 25 (2001) 1543±1551

et al. (1985) method to account for an econometric

P problem that results from
the fact that the Rij Õs are fractions. Since Rij ˆ 100% in all auctions, if we
include all 10 observations in each auctioned IPO, the residuals will be per-
fectly correlated in the above equation. To alleviate the problem, we drop the
demand at prices that end with nine and estimate the equation with 243 ob-
servations (i.e., 27  9 observed Rij Õs) instead of 270 observations. To verify that
dropping these observations does not bias the results, we also estimate the
equation after dropping the demand at prices that end with four.
The estimated relation is (t-statistics are in parentheses below the estimated
coecients):
\9" omitted : Rij ˆ 8:6 ‡ 6:5I5 ‡ 5:4I0 ; R2Adj: ˆ 0:21;
…15:0† …4:0† …2:5†

\4" omitted : Rij ˆ 8:4 ‡ 6:7I5 ‡ 5:4I0 ; R2Adj: ˆ 0:21:

…14:7† …4:2† …2:6†

Thus, the average demand at ``regular'' prices is about 8.5% of the total de-
mand, which is signi®cantly lower than the equal-likelihood of 10%. Demand
at prices that are divisible by ®ve is about 6.5 percentage points even higher
than demand at ``regular'' prices. The demand at prices that end in a zero is
higher by more than ®ve additional percentage points. This con®rms the
conclusion that investors are more inclined to use prices that are divisible by
®ve than non-round prices and are even more inclined to use prices that end
with a zero.
Auction theory suggests that investorsÕ ®rst-best strategy in second-price
sealed-bid auctions, such as the auctioned IPOs we analyze, is to bid truthfully.
Yet, if there is price clustering in the auctioned IPOs we analyze, smart in-
vestors may try to exploit other investor tendency to use round prices by
bidding at prices just above the preferred prices. Indeed, in Fig. 1, we see that
there is a extra propensity to bid at prices that end with either one or six.
Formally, in 23 out of the 27 auctions, the average Rij for the digits 1 and 6 is
higher than the average demand at prices that end with 2, 3, 4, 7, 8 or 9. This is
signi®cantly di€erent from the number of occurrences expected under the null
hypothesis that it is equally likely that the demand at these prices is either
above or below the demand at prices that end with 2, 3, 4, 7, 8 or 9.
To test whether there is strategic exploitation of investor inclination to over-
use round numbers, we re-estimate Eq. (1) with a dummy variable for the
excess demand at prices that end with either one or six, I1;6 . The estimated
equation is:
Rij ˆ 7:0 ‡ 8:1I5 ‡ 5:4I0 ‡ 5:4I1;6 ; R2Adj: ˆ 0:264:
…10:7† …5:1† …2:6† …4:5†

The signi®cant coecient of I1;6 con®rms the result that there is excess demand
at prices that end with either one or six, possibly motivated by the desire of
 S. Kandel et al. / Journal of Banking & Finance 25 (2001) 1543±1551 1549

smart investors to exploit the propensity of other investors to excessively use

round prices.
The propensity of investors to bid at round prices may be more pronounced
at higher prices as, at higher prices, the percentage impact of changing bid
prices by one NIS on the cost of the investment and on its return is smaller than
its impact at lower prices. In Fig. 2, we plot the relative demand at round
prices, measured by the sum Ri0 ‡ Ri5 in each of the sample auctioned IPOs,
against the auction-clearing price. In this ®gure, the auction-clearing price
serves as an indicator of the auctionÕs price level. The positive correlation
between the propensity to use round numbers and the absolute level of prices is
apparent in the ®gure. To formally test whether there is the propensity to use
round prices increases with auction price level, we estimate the correlation
coecient between the auction-clearing price and the total relative demand at
round numbers, Ri0 ‡ Ri5 . The estimated correlation coecient is 0.40, which is
signi®cantly di€erent from zero at 0.1%, con®rming the monotone relation
between the tendency to use round prices and the auction price level.
Another aspect of the disproportionate use of round-number orders by in-
vestors is the frequency of round numbers in the end result of these orders ± the
clearing prices of these auctions. Out of 27 auctions, 6 resulted in clearing
prices that ended with 5 and 6 resulted in clearing prices that ended with 0.
Both realized frequencies are higher than the expected frequencies under the
hypothesis that all last digits are equally likely (i.e., 10% of the 27 cases or 2.7
cases). Formally, the frequency of auction prices that end with prices that are

Fig. 2. The relation between the auctionÕs price level and the extent of price clustering.
1550 S. Kandel et al. / Journal of Banking & Finance 25 (2001) 1543±1551

divisible by 5 is signi®cantly higher than the expected number under the null
hypothesis of uniform frequency of all last digits (p-value 3.04%).

4. Conclusions

In this paper, we provide direct evidence regarding investor inclination to

use round stock prices, by examining investor orders placed in Israeli IPOs
conducted as uniform-price auctions. We ®nd that investors are more likely to
use round prices (i.e., prices that end with 0 or 5) in their orders than to use
non-round prices. We also ®nd that prices that end with 0 are used more often
than prices that end with 5. This means that some investors who participate in
these IPOs tend to use round prices more often than non-round prices.
Two types of arguments have been forwarded to explain the price clustering
that has been observed in several markets: that clustering simpli®es negotia-
tions and that it re¯ects strategic pricing to exploit buyers. These are possible
explanations for price clustering in markets in which clustering has been ob-
served to date: markets in which transaction prices are determined by price
negotiations or are posted by sellers. This research is di€erent from prior
studies in that we examine price clustering in a primary auction market ± the
market for initially o€ered securities (IPOs). In this market, limit buy orders
are submitted directly to the issuing ®rm by thousands of individual investors.
Hence, the use of round numbers cannot be explained by strategic pricing or by
agreement to negotiate over a subset of possible prices to lower negotiation
costs. Rather, the price clustering that we document solely re¯ects investor
inclination to over-use round prices.

Acknowledgements

We would like to thank all the underwriters, who so kindly let us use the
auction data, and two anonymous referees for helpful suggestions.

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