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In this study, we examine the relation between pre-offering demand and aftermarket performance of IPO firms in the Hong Kong stock market. We find that IPOs with high investor demand realize large positive initial returns but negative long-run excess returns, while IPOs with low investor demand realize negative initial returns but positive long-run excess returns. This result suggests that (1) pre-offering demand for IPOs is at least partly driven by investors’ over- or underreactions to information about firms’ post-issuance prospects, and (2) while high- and low-demand IPOs are not priced at their intrinsic values in early aftermarket trading, eventually their true values are reflected in their pricing.
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... As far as the review on past studies is concerned, studies on winners' curse hypothesis are skewed to test its influence only on initial return of IPOs (e.g., Abdul Aggarwal et al., 2008;Amihud et al., 2003;Lin et al., 2010;Welch, 1992;Yong, 2009Yong, , 2011). Nearly no study is found to relate it to flipping activity. ...
... Welch (1992) and Aggarwal et al. (2008) criticises some explanations in winners' curse hypothesis when they offer an alternative explanation that skews to the bandwagon effect. The two studies suggest that a higher institutional investors' participation in an IPO is the key factor that will produce a higher initial return because these IPOs attract additional demand from investors who participate in the IPO by merely imitating the behaviour of the institutional investors. ...
... This parallel pattern between yearly flipping activity of both measurements and number of IPOs issued could be due to the optimism of investors on IPO market that eventually increases demand of the IPOs. As suggested by Welch (1992) and Aggarwal et al. (2008), IPOs which are highly demanded usually will produce higher initial returns. Hence, motivates new shareholders to immediately dispose their allocated shares. ...
... Therefore, the stock prices were rising at the short-time whereas in the long-time due to an adjustment of the availability information it would be declined, it was called stock prices reversal. Previous research found the phenomena of stock price reversal in many financial events such as IPOs (Ritter 1991;Agarwal et al. 2008;Cai et al. 2008;Thomadakis et al. 2012) and SEOs (Wadhwa et al. 2016). Many scholars argued that the stock price reversal at financial events due to the existing of investor overreaction in capital market (Ritter 2003;Agarwal et al. 2008;Cai et al. 2008;Vakrman, Kristoufek 2015). ...
... Previous research found the phenomena of stock price reversal in many financial events such as IPOs (Ritter 1991;Agarwal et al. 2008;Cai et al. 2008;Thomadakis et al. 2012) and SEOs (Wadhwa et al. 2016). Many scholars argued that the stock price reversal at financial events due to the existing of investor overreaction in capital market (Ritter 2003;Agarwal et al. 2008;Cai et al. 2008;Vakrman, Kristoufek 2015). This research also examine the overreaction hypothesis in capital market, but not only restricted on financial events like IPOs and SEOs.Daniel et al. (1998)said that overreaction behavior occurred due to investor overvalued on recent information in capital market. ...
... But the existing research not fully explained what and how the private information signals affected on the overconfidence behavior. For exampleAgarwal et al. (2008) andBoussaidi (2013), they used trading volume, price reversal, and trading volatility to capture the investor overconfidence and stocks' price overreaction. Higher trading volume of stocks has a mean of higher demand from investor to buy the stocks due to overconfidence of their private information. ...
This research examines the existing of investor overconfidence in the capital market and the phenomena of stock prices reversal in the future due to the existing of this behavior. It has a different approach to test the existing of investor overconfidence by introducing firm’s growth as the information which has triggered many investors to behave overconfidently. By using multiple regression analysis, the results of this research confirmed our conducted hypothesis, investor tends to behave overconfident to firms which have higher growth. It proofed by the positive relation between firms’ growth and trading volume. Afterward, this research also found that higher growth firms tend to have declining on its performance in the future. The negative relation between firms’ growth and longterm performance means that the stock’s price reversal caused by the existing of investor overconfidence.
... Other profiles, however, are more inclined toward the quality signalling. Specifically, these IPOs with longer lock-up period (prior revision) tend to report 1 High demand which then leads to higher initial returns ( Agarwal et al., 2008, Courteau, 1995). ...
... Interestingly, the results after segregating the IPOs based upon the prior and post revisions on lock-up period (Table 3) show that IPOs with longer lock-up periods tend to have profiles that are more inclined toward indicating higher quality firms. These IPOs also report a higher demand, which is more likely to lead to higher initial returns ( Agarwal et al., 2008;Courteau, 1995) and a lower mandatory LR. Such profiles normally characterise firms of higher quality or lower risks. ...
The purpose of this paper is to examine the impact of the Malaysian IPO regulatory change involving lock-up provisions on the initial performance of Malaysian IPOs. This study examines the impact of the revision in the IPO lock-up provision that took effect on February 2008 on the initial returns of 373 IPOs listed between January 2000 and December 2012, using cross-sectional multiple regressions. The findings indicate that the dummy of the lock-up period is positive and significant, validating that the dramatic drop in initial performance of Malaysian IPOs is an attribute of the shorter lock-up period regime. The new shorter lock-up period regime leaves fewer opportunities for speculation activities through IPOs. Investors may strategise to participate in firms that report higher lock-up ratio as it is likely to increase the initial returns.
... Because public offering can signal to the market that firm value is overestimated, it has a generally negative announcement effect (Asquith & Mullins, 1986; Mikkelson & Partch, 1986). However some other studies on IPO show that firm's initial returns depend on market demand, which plays an important role in its pricing (Mauer & Senbet, 1992; Agarwal et al., 2008). Regardless of initial returns, stock price will go to balance which reflects firms' true value (Agarwal et al., 2008), indicating that the market not only has a super ability in information discovering and processing but also can make adjustment to previous prediction. ...
... However some other studies on IPO show that firm's initial returns depend on market demand, which plays an important role in its pricing (Mauer & Senbet, 1992; Agarwal et al., 2008). Regardless of initial returns, stock price will go to balance which reflects firms' true value (Agarwal et al., 2008), indicating that the market not only has a super ability in information discovering and processing but also can make adjustment to previous prediction. Similarly, the market should also be able to make prediction and react to the announcement of private placement. ...
What effect does market feedback have on managers’ decisions on private placement in family firms? Based on information asymmetry, agency theory, and corporate governance theory, we investigate the relationship between managers’ final decisions and market feedback to the announcement. We find that managers in family firms accept market feedback in decision-making and their attitude can be affected by many external factors. Managers tend to listen to the market when family firms are non-high-tech, when family members participate in purchasing the placed shares, when family members serve as managers, and when separation of control rights from ownership is small.
... Empirical studies investigating demand of IPOs, have been limited to date, and usually only peripherally mentioned in studies examining well-known phenomena such as underpricing and underperformance of IPOs. Example of these studies include Agarwal et al. (2008); Cassia et al. (2004); Chahine and Tohmé (2009); Jagannathan and Sherman (2007); Kenourgios et al. (2007); Lee et al. (1996); Leung and Menyah (2006); Lin et al. (2007); Low and Yong (2011); Marisetty and Subrahmanyam (2010); Ramasamy et al. (2013); J. R. Ritter (2003); Tian (2011); and Yong (2011) covering both developed and emerging economies. Table 1 (below) lists the levels of demand (proxy by oversubscription ratio) in some selected countries. ...
... These levels seem to vary across both time and countries. For example, while Agarwal et al. (2008) found a very high oversubscription ratio averaging 91.36 in the Hong Kong market during the 1993-1997 period, they also maintained that in general investor demand there was fairly volatile adding that "some hot IPOs are oversubscribed by as much as 1000 times the number of shares offered, whereas, some cold IPOs have to be postponed or even cancelled because of undersubscription" (p. 178). ...
Using a sample of 80 IPOs in the Saudi Arabian market between 2004 and 2011, in this paper we empirically investigate the effect of sharia compliance status on investor (individuals and institutions) demand for new shares offered in initial public offerings (IPOs). After controlling for some pre-listing information including size, age of the firm, offer risk, offer price, block-holding, market condition and the effect of the Global Financial Crisis (GFC), we find that Sharia compliance status significantly alters the demand for new issues when measured by two different proxies, the ratio of oversubscription and the number of subscribers. We also find that market condition and block-holding, offer risk, age and size of firms can significantly explain some of the variations in the demand. Pivotally, institutional investors were found to emphasize profit-maximization over considerations of Sharia-compliance, whereas for individual investors (the majority here) the opposite was true. We conclude that sharia compliance status should be taken into account by issuers with a greater emphasis on privatization IPOs where the government aim is to distribute wealth among its citizens.
... As noted in the previous section, both pre-market sentiment and aftermarket sentiment affect positively the offer-to-open return and open-to-close return on the first day of trading. To the extent that IPOs are overpriced as a result of pre-market and aftermarket sentiment, we would expect that the IPOs with greater pre-market and aftermarket sentiment to more severely underperform in the long run, as over-optimistic sentiment fades away and short-sale constraints are lifted 9 9 Previous research provides both theoretical argument (Ritter and Welch, 2002; Ljungqvist et al. 2006) and empirical evidences (Derrien, 2005; Cornelli et al., 2006; Agarwal et al., 2008; Dorn, 2009; Da et al., 2011) for IPO long-run underperformance. ...
... In contrast, the coefficients of pre-market sentiment proxy, SUBRATE, are not significant. This is differs from the finding of Agarwal et al. (2008) using Hong Kong IPOs that the oversubscription rate is negatively related to long-run performance. It is likely that our aftermarket sentiment measures subsume pre-market sentiment. ...
Using a sample of 293 IPOs in Hong Kong, we separately measure pre-market sentiment and aftermarket sentiment and examine their impact on IPO pricing in a two-stage framework. We find that underwriters only partially adjust offer price to reflect pre-market sentiment and the money left on the table is positively related to the anticipated deterioration of investor sentiment in the aftermarket stage. We also show that aftermarket sentiment causes a further price run up in the secondary market. Overall, our findings suggest that institutional investors play an important role in re-distributing shares in the secondary market and underwriters take into consideration of in investor sentiment during pre-market and aftermarket stages in pricing IPOs.
... The fifth variable, that is, prior market conditions also influences the over-subscription ratio. As indicated by Derrien and Womack (2003) and Agarwal et al. (2008) , hot market conditions lead to oversubscription . To represent the market conditions (MKTCON), we use the average of three months EMAS index returns prior to IPO listing. ...
This paper examines the effects of the involvement of informed investors and the presence of information asymmetry in fixedprice mechanism on over-subscription ratio in the Malaysian initial public offerings (IPO). Analyzing the data on 373 IPOs listed on Bursa Malaysia from 2000 to 2012, we find an insignificant positive relationship between informed investors and over-subscription. However, the relationship between information asymmetry and oversubscription is strongly negative. The negative effect of company size suggests that big companies that are considered to have lower information asymmetry receive less investors' interest, as investments in low risks companies are expected to provide lower initial returns.
... Brav, Geczy and Gompers (2000) investigate offer size; they found the long-run IPO underperformance is found stronger for smaller companies. Aggarwal et al. (2008) investigate subscription rate, the result shows the IPOs with high initial demand documents negative long-run excess returns. Hoechle and Schmid (2007) examine leverage; they find the IPOs with high leverage ratio perform better in the long time compared to the low levered IPOs. ...
In 2012, Asia cell was recognized by the French market research company Altai and it was the largest limited
liability company in Iraq before its IPO. As a reflection of its well established reputation for quality, reliability
and service. Asia cell accomplished nationwide network coverage by end of 2009 and continues to seek to be the
individual and business first choice for mobile telecommunications in Iraq. Asia cell benefits strong support of
its founder, Mr. Faruk Rasool, also its main and biggest shareholder Qatar Telecom that has enormous experience
in successfully running and advancing mobile telecommunications providers across the MENA region and
South-East Asia. Therefore, Asia cell’s covered a network 97% of Iraq’s population of 34 million people at 30
September 2012.The results shows that there is decline in the company’s performance measured by ROA, ROE,
EBITDA, EBITDA margin, and net profit in four different times period (one week, one month, three month, and
one year) from listing on Iraqi stock exchange. While, Asia cell’s Revenue increase in all times period.
Additionally, Asia cell share price increase in the first week of IPO to across 25 Iraqi Dinars, but later face a
severe fluctuations that lead to a decline to less than 20 Iraqi Dinars per share as shown in the Appendices (1-16).
Its customers also increase from 9 Million customers, 10.1 Million customers and 10.7 Million customers in
years 2011, 2012, and 2013 respectively. The successful IPO of Asia cell in 3 February 2013 was regarded as one
of the two unprecedented developments potential may help lead remarkable foreign capital inflows into
Kurdistan region and Iraq.
... On that basis, insiders' action in locking their shares voluntarily must be interpreted as a good signal about the companies because the signal is costly and difficult to replicate for low-quality companies. Similarly, Aggarwal, Liu and Rhee (2008) posit that demand on IPOs will also increase when the IPOs are largely offered to institutional investors. Because institutional investors are considered information-opaque, they should invest in only assets that are expected to produce greater wealth in the future. ...
... The final equilibrium price can be determined by the volume of shares available for buying and the potential demand. When the issue price of shares is equal to the expected price of the buyers, and the number of shares issued is equal to the potential demand, the price tends toward equilibrium, which will reflect the intrinsic value of an IPO share (Agarwal et al (2008)). Our work is organized as follows: firstly, we present the theoretical basis that will lead us to formulate our research hypotheses. ...
This work provides an analysis of the equilibrium value after listing, reflecting the window to return to equilibrium. Our study examined a sample of 103 French companies during 2005-2008. The results show that the underperformance is confirmed in the three years following the IPO. The results allow us to see that investor demand is a good indicator of the timing necessary to return to the equilibrium value after listing. On average, the speed of adjustment of prices after listing is between 20 and 30 trading days (approximately three weeks of negotiations). Thus, the negative and significant relationship between the oversubscription rate and the performance during the three years following the listing can be attributed to over optimism or pessimism of investors from the prospects of the IPO firm.
... I started with forming portfolios of companies that demonstrate market timing behavior and portfolios of companies that do not. According to S. Agarwal, C. Liu, S.G. Rhee (2008), investors have either a high demand or a low demand for certain IPOs offerings, as such, when investors demand is high for some IPOs offerings then those IPOs achieve an initial positive returns but negative in long run and vice versa I built on those ideas by giving a reason of why investors demand are high for certain IPOs offerings and low in another, as such, when investors know that some companies are timing the market , then they are most likely will manage earnings so investors demands will be low in that instance and vice versa. Table 2 shows that some IPOs companies who cross-list while the U.S. market (host market) condition is a positive (based on the average S&P 500 index return in the period (0, +50), achieve significant negative abnormal returns (-26.19%) after their IPOs cross-list, particularly in the period (11, +50). ...
IPO literature documents that IPO firms experience a decline in returns after listing. This paper investigates that phenomena and tries to find reasons for it. Earning management studies report that if companies have a high level of discretionary accruals, then those companies engage in earnings management. This paper connects these two literature branches together by using a third part of literature, which is market timing and market efficiency. I built a dummy variable DTIMERS that takes the value of one if the companies time the market and zero if they do not. I ran multiple regression models where Absolute Discretionary Accrual is the dependent variable, with DTIMERS as an independent variable along with other control variables. The evidence shows the IPO companies that time the market engage in earnings management, and that may explain why those companies in the post-listing period achieve significant negative abnormal returns while other IPOs who do not manage earnings achieve significant positive abnormal return in the post-listing period.
... Findings would be more complete if more factors are included as variables in determining post-IPO performance. Some of these factors include managerial decision, investor demand (Agarwal, Liu and Rhee, 2008) and multi-nationality of a firm. The lack of data availability disabled other factors to be incorporated into the models. ...
The performance of Initial Public Offerings (IPO) has been investigated in numerous studies but little attention has been paid to shed more light on the factors that influence the success of these IPOs. This paper investigates the relation between pre-IPO characteristics and post-IPO operating performances. The objective of this study is to identify the determinants of post IPO operating performance. The pre-IPO factors include pre-IPO profitability, dilution of ownership, age and size of firm. The post-IPO operating performances include: return on asset, return on sales and asset turnover. Using newly public-listed companies on the Main Board of Bursa Malaysia from 2000 to 2004, findings confirmed that pre-IPO profitability and firm size are the key predictors of post-IPO performance. The results obtained provide useful information and caution for prospective investors in new issues.
... The investors, as a result earn abnormally high returns as compared to the benchmark market and index on the day of listing (Kuklinski 2003;Ritter 1984;Ibboston 1975). Whereas, Peristiani, Stavros, Hong and Gijoon, (2004) and Agarwal, Liu, and Rhee (2008) pointed out that at the time of going public, firm's characteristics have an impact on the aftermarket price performance of the IPOs which can be predicted beforehand. Jay R. Ritter (1991) investigated the initial returns (1 st trading day) by using a sample of 1,526 IPOs from 1975 to 1984 and estimated 16.7% first trading day average returns. ...
... Finally, in examining the relationship between the five signals and initial return, the present study took into account four control variables (i.e. private placement, offer size, demand [OSR], and market conditions) due to their significant relationship with initial return as empirically documented by the Malaysian literature (Abdul-Rahim, Che Embi, & Yong, 2012;Abdul-Rahim & Yong, 2010;Agarwal, Liu, & Rhee, 2008). ...
... In regard to the control variables, their influence on initial returns are more noticeable in smaller than in bigger firms. Individually, in contrast to Yong (2011) but consistent with Agarwal et al. (2008), IPOs issued to institutional investors via private placement (DPRIV) seem to have a significantly positive coefficient, indicating that institutional investors create additional demand and therefore higher return of the IPOs. However, the impact is significant only in the smaller firm portfolio. ...
... Furthermore, the size-based sorting was employed by Agarwal et al. (2008), and the justification for using firm size as a proxy for information asymmetry was provided by Beatty and Ritter (1986), Barclay and Smith (1995), and Goergen et al. (2006). They argued that younger and smaller firms are exposed to greater uncertainty than mature and larger firms. ...
The purpose of this paper is to examine whether initial public offering (IPO) over-subscription is a function of firm’s prestige signals conveyed by third parties with reputational capital such as underwriter, auditor and independent non-executive board member.
The relationship between prestige signals and over-subscription ratio (OSR) of IPOs is analysed using a cross-sectional regression based on a sample of 393 IPOs issued between January 2000 and December 2015.
The results indicate that IPOs underwritten by reputable underwriters have lower OSR than those underwritten by non-reputable underwriters. While issuer engages reputable underwriter to certify firm quality to reduce information asymmetry, the action brings with it lower initial returns for its IPO. Investors interpret the signal conveyed by issuer’s choice of underwriter from under-pricing perspective and respond accordingly by reducing IPO demand. This implies that investors regard under-pricing as a more valuable signal than firm quality signal associated with underwriter reputation. The findings also indicate that over-subscription increases in IPOs that have above average initial returns and higher institutional participation. Issuing firms that go public in a period of high IPO volume are associated with low OSR.
This is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.
... Il s'avère toutefois inégalement prononcé selon les places. Par exemple, des rentabilités anormales négatives de -48% sont relevées à Hong-Kong (Agarwal et al., 2008), contre -23% en Chine (Kao et al., 2008). L'apparente sous-performance à long terme des titres nouvellement cotés appelle deux réserves. ...
(VF)Cette étude analyse l’évolution des performances opérationnelles et boursières d’un échantillon de 379 introductions en bourse réalisées en France entre 1990 et 2003 sur les second et nouveau marchés. Les résultats montrent que les performances opérationnelles des entreprises françaises s’améliorent avant l’introduction en bourse puis se dégradent les cinq années post introduction. Par ailleurs, la diminution des performances opérationnelles dans les 3 ans (respectivement 5 ans) post introduction apparaît déterminer significativement la sous-performance boursière à 36 mois (respectivement à 60 mois). Ce résultat semble corroborer le modèle comportemental du timing.(VA)This study analyzes the long-run operating and stock market performance of a sample of 379 initial public offerings (IPOs) on the French Second Marché and Nouveau Marché between 1990 and 2003. Our results suggest that companies going public experience substantial improvements in operating performance prior to the offering, while the tendency is reversed after the offering has taken place. We also study the link between operating performance and long-run returns. The results suggest that IPOs with poor subsequent operating performance exhibit poor stock performance.
... The fifth variable, that is, prior market conditions also influences the over-subscription ratio. As indicated by Derrien and Womack (2003) and Agarwal et al. (2008) , hot market conditions lead to oversubscription . To represent the market conditions (MKTCON), we use the average of three months EMAS index returns prior to IPO listing. ...
This paper examines the effects of the involvement of informed investors and the presence of information asymmetry in fixed-price mechanism on over-subscription ratio in the Malaysian initial public offerings (IPO). Analyzing the data on 373 IPOs listed on Bursa Malaysia from 2000 to 2012, we find an insignificant positive relationship between informed investors and over-subscription. However, the relationship between information asymmetry and over-subscription is strongly negative. The negative effect of company size suggests that big companies that are considered to have lower information asymmetry receive less investors' interest, as investments in low risks companies are expected to provide lower initial returns.
This study focuses on the strategic-political importance of firms undertaking IPO in China’s international Hong Kong market. This market setting is of particular interest given the unique mix of state-backed and privately-owned issuers drawn to it. I find that an issuer’s strategic-political importance is strongly and positively related to post-IPO returns. An issuer’s strategic-political importance is also negatively correlated with the variance of changes in its post-listing earnings and revenue. Overall, the present study suggests that state support correlates with enhanced post-IPO stock returns and more stable sales turnover and earnings. However, results show that state ownership does not necessarily translate into increased post-IPO revenue and earnings growth. The paper’s second major contribution relates to the identification of pronounced subscription “cascades” (Welch in J Financ 67(2):695–732, 1992) and how these correlate with post-IPO returns. Results suggest that insipid (overly exuberant) subscription demand presages strong (weak) post-listing returns. Consistent with “cascade” arguments (Welch 1992), return reversals occur without commensurate revenue or earnings change. Finally, and in terms of valuation uncertainty (Miller in J Financ 32(4):1151–1168, 1977), findings point to an inverse association between post-IPO stock returns and the magnitude of an issue’s prospectus-disclosed offer price range.
This study examines a sample of 384 initial public offerings (IPOs) issued and listed on Bursa Malaysia from January 1999 to December 2008. The objectives of this study are to examine the difference in initial returns of Shariah versus non-Shariah IPOs and the factors that explain the initial returns of these IPOs. A matched sample of Shariah IPOs, which contains the same number of IPOs and share similar characteristics with the non-Shariah IPOs, is created to ensure a more compatible comparison. The results of the difference tests consistently show that the initial returns of non-Shariah IPOs are not statistically different from those of all and matched sample of Shariah IPOs. The cross-sectional multiple regressions yield results demonstrating that Shariah and non-Shariah IPOs share only one common factor: allocation rate. Other than the sole common factor, the initial returns of non-Shariah IPOs are determined by external factors, namely the reputation of the underwriter and the condition of the market. On the contrary, the initial returns of the Shariah IPOs (all) depend on internal factors, namely the size of the offer; the age of the firm; and the ownership of the top five shareholders. As far as the result of the matched Shariah sample is concerned, none of the other variables are significant in explaining the initial returns.
With regard to purchasing Tunisian IPOs shares, the current paper aims at considering two types of investors: a non-institutional investor and an institutional one. Each is concerned with placing a purchase order at the offer price during the subscription period. In line with the literature on IPOs, we attempted to determine the minimum price required by an investor allowing for recovering the initial investment, information costs, transaction costs, and the offsetting of shortfall. We expect that the initial return of an IPO share in the Tunisian market is positively related to the following factors: the number of non-institutional investors participating during the subscription period, the subscription ratio of institutional investors, the expected rate of return by investors, the gap between the closing date of the subscription period and the day following the announcement of the subscription result, the gap between the announcement of the subscription result and the first listing day, the number of trading days, the cost of information and the transaction costs. However, it is negatively related to other determinants, such as the discount level, the number of shares allocated for a non-institutional investor and the number of offered shares, which are allocated to non-institutional investors.
The purpose of this paper is to investigate the effects of Shariah -compliant status and the presence of information asymmetry on investors’ demand for initial public offerings (IPOs) in Malaysia.
The data regarding 260 IPOs dated for a duration of 11 years were acquired from the websites of Bursa Malaysia and Malaysian Issuing House. In evaluating the association between IPO oversubscription and the independent variables in this study, multivariate and quantile regression analyses were implemented.
It was found that Shariah -compliant status (DSHARIAH) had a significant positive relationship with IPO oversubscription. With this, it was indicated that Shariah -compliant status gains investors’ interests in subscribing to IPOs as these shares could be distributed to a wider group of investors. In the case of the proxies of information asymmetry, although firm size posed significant effects on IPO oversubscription, the effects were negative. Meanwhile, institutional investors posed significant positive effects on IPO oversubscription. Furthermore, it was indicated from the negative effects of firm size that less subscription is received by large firms which are perceived to possess lower information asymmetry from the investors. This is owing to the less underpricing provided by the issuers for their IPOs. However, it was indicated from the significant positive association between institutional investors and IPO oversubscription that the participation in the IPO among institutional investors would enhance the enthusiasm of investors for a specific stock and increase the probability of IPO oversubscription. With this, the winner’s curse hypothesis was supported.
It is recommended that future studies investigate the compliance aspect, specifically the financial and nonfinancial aspects which may affect investors’ decision-making process for their investment.
With the availability of this study’s indicators in the prospectus, the findings of this study have provided useful insights for an issuer and underwriter to ensure a good subscription of its issuance.
The findings of this study have provided further comprehension to investors regarding the essential information found in the prospectus during the decision-making process done for IPO subscription.
To the best of the authors’ knowledge, this is one of the first articles which have proven the effects of Shariah -compliant status and the presence of information asymmetry on IPO investors’ demand.
This paper investigates the IPO performance in the in the Gulf countries, using restricted access data from regularity bodies in those countries. Contrary to asymmetric and symmetric information theories, the IPO performance in these countries rely on the unique institutional framework adopted by regulators. We also find that governance regulation in in an economy with weak regulations tends to provide better protection for investors in the IPO markets. Also, we conclude that underpricing is more sever when foreign investors are banned from sharing IPOs.
We analyze the anatomy of IPO waves in China and Hong Kong and draw comparisons with the US IPO cycles. The lead-lag relationship between IPO initial returns and IPO volume observed in the US is absent in these two Asian markets. Similar to the US, IPO volume in Hong Kong is sensitive to changes in market conditions and exhibits seasonal variations. In sharp contrast, however, Chinese IPO activity is much less responsive to past market returns and volatility. Surprisingly, hot markets still emerge in China, not because of market forces as in the US and Hong Kong, but due to regulatory choices.
This article investigates the relationship between subscription rate and aftermarket volatility for IPOs issued in India during the period 2002-12. The empirical findings corroborate the evidence that subscription rate is a good indicator of aftermarket volatility for the IPO stocks. This study also finds that retail subscription rate is relatively more significant and powerful in predicting volatility than institutional investors. Surprisingly, offer size, investment bank prestige and debt-equity ratio is insignificant in explaining aftermarket volatility. The outcome can be used by the market participants to understand the potential fluctuations in the prices. This article also evaluates volatility of the IPO stocks on listing day.
This study investigates subscription rates across institutional and non-institutional retail investors for 149 initial public offerings listed in Indian stock market. We document a positive relationship between underpricing and subscription rate of all investor groups. We also find a significant shift in response pattern across institutional and non-institutional retail investors towards underpriced and overpriced IPOs. Our result supports the information asymmetry argument, suggesting that informed investors (institutional investors) are heavily subscribing for underpriced IPOs and shy away from overpriced issues. Cross-sectional regression results indicate that institutional investors' subscription rate is statistically significant (and positive) while evaluating retail investors' response rate. This evidence strongly suggests that retail investors sequentially learn from more sophisticated and informed (institutional) investors while applying for IPOs. Further, it is found that non-institutional retail investors heavily subscribe for IPOs from mature firms having long operational history. Empirical results confirm that larger offers and IPOs having more post issue promoter group retention are more underpriced.
This paper investigates empirical existence of theories of IPO underpricing in Bangladesh. The study based on IPO listed at Dhaka Stock Exchange (DSE) from 2003 to 2013 analyses Level of IPO underpricing and its determinants. OLS regression is used to distinguish the relationship between various independent variables with dependent variable-level of underpricing. The result reveals that market capitalization, underwriter's reputation, oversubscription rate, offer size, float, ownership retention and method of issue have significant effect on the level of IPO underpricing, whereas size of the firm and offer timing has very little explanatory power. The significant effect of these variables identifies the presence of signaling theory, agency theory, winners curse theory, anchoring theory and impresario hypothesis in IPO pricing where signaling theory is most prominent one in deciding IPO underpricing in Bangladesh.
‘Cornerstone’ investor agreements, in which high net-worth entities receive a guaranteed block of IPO shares, constitute an important potential signal of IPO value. Their recent emergence in the Hong Kong market setting, in tandem with detailed prospectus disclosures on such items, opens-up a new field of inquiry in the IPO information signalling arena. I demonstrate a strong link between such agreements’ various dimensions (i.e., presence, size, number of investing parties and lock-up period) and initial IPO value, as measured by market-to-book and Tobin’s Q, at various points during the first 30 days’ trading. Consistent with signalling arguments, cornerstone-invested entities display stronger post-listing earnings growth. Global coordinators’ on-market stabilization actions are also inversely related to all four cornerstone dimensions (presence, size, number and lock-up period). The present study also examines the dual-trance structure of HKEx-organized IPOs and finds that the proportion of shares initially assigned the retail (placing) tranche is inversely- (positively-) related to market-to-book and Tobin’s Q multiples. This result is consistent with more informed (institutional, corporate and high net-worth individual) investors squeezing-out retail investors in the most attractive issues. Higher valuation multiples are also evident where the placing arm is internationally-based and in issues containing secondary offers.
This paper focuses on the underpricing and the short- and long-run performance of Finnish initial public offerings (IPOs). More specifically, we examine whether there are differences between the performance of value and growth stock IPOs in the Finnish stock market. Our results indicate that growth stock IPOs are slightly more underpriced and have marginally higher short-run returns. However, value stock IPOs are better long-run investments and provide higher returns during the first three years in the aftermarket. We also document that the apparent long-run under-performance of Finnish IPOs can be largely explained by size, book-to-market, and momentum effects.
In recent years, China has partially privatized some of its most important state-owned enterprise companies. Hong Kong has been host to the largest of these issues and during the five-year period, 2005–2009, more initial public offering (IPO) funds were generated through this market than any other. A key development in this market has been the emergence of ‘cornerstone’ investor agreements, which earmark stock allocations to privileged investor parties in the immediate run-up to prospectus release. This study offers a number of important contributions. First, after assessing the characteristics of such agreements, multivariate results point to some evidence of a positive association between the presence of such agreements and initial IPO returns. Second, the Perotti (1995) model contention of increased initial returns in state-controlled entities fails to garner support. Third, as an extension of work on the ‘political connections’ of Chinese A-share issuers (Fan et al., 2007; Francis et al. 2009), the political importance of issuers in the Hong Kong market-place is assessed. This study finds little evidence to support the notion that China's most politically important (strategic) issuers face lower underpricing levels than other issuers. Fourth, IPOs pitched between the incipient phase of the Global Credit Crunch (November 2007) and the Lehman Brothers’ Collapse (September 2008) generated significantly weaker initial returns than issues in other periods. Fifth, IPO clustering, underpricing rates on concurrently positioned offerings and an issuer's price-to-earnings ratio also function to explain initial returns. This last area supports the contention that offer prices fail to fully impound publicly available information (Bradley and Jordan, 2002; Loughran and Ritter, 2002).
This study examines the long-run performance of initial public offerings on the Stock Exchange of Mauritius (SEM). The results show that the 3-year equally weighted cumulative adjusted returns average −16.5%. The magnitude of this underperformance is consistent with most reported studies in different developed and emerging markets. Based on multivariate regression models, firms with small issues and higher ex ante financial strength seem on average to experience greater long-run underperformance, supporting the divergence of opinion and overreaction hypotheses. On the other hand, Mauritian firms do not on average time their offerings to lower cost of capital and as such, there seems to be limited support for the windows of opportunity hypothesis.
Global and regional crises have been some of the most prominent challenges for Asian businesses and economies. This chapter aims to contribute to the literature by proposing a multidimensional conceptualization of crisis. By introducing a new crisis-related concept—crisis uncertainty—and its three dimensions, this chapter demonstrates how dimensions of crisis uncertainty characterize different facets of crises and explain different impacts on firm responses in the context of IPO underpricing. As an initial attempt, this multidimensional conceptualization of crisis provides the foundation of a theory of crisis and opens up several important directions for future research.
Prospectus profit forecasts (PPF) constitute one of the most important discretionary disclosure items in an IPO. I examine such disclosures in the Hong Kong market, where both IPO activity and PPF disclosure rates are at high levels. The median forecast typically ‘underestimates’ future earnings by around 6%. More importantly, PPF disclosure exhibits a strong inverse association with pre-listing owners' retained equity levels (Hughes, 1986; and Li and McConomy, 2004). PPF disclosure is thus more likely in IPOs raising more capital and generating larger floats. I also demonstrate a strong link between PPF disclosure and post-IPO earnings drift.
Ensuing forecast errors also bear strong connection with IPO coordinators' initial price determinations as well as with subsequent investor returns. This area usefully extends the related literature (Cheng and Firth, 2000; Chen, Firth and Krishnan, 2001; Jog and McConomy, 2003; Chong and Ho, 2007; and Gounopoulos, 2011), which stresses an association between forecast errors and initial investor returns but ignores the preceding price ‘determination’ process. It also suggests that forecast errors serve as a valuable ex-post proxy for the amount of ex-ante uncertainty surrounding issuer value (Beatty and Ritter, 1986; Falconieri, Murphy and Weaver, 2009). This study also demonstrates a connection between final offer price ‘determinations’ and the information content and “superiority” of PPFs (Brown, Richardson and Schwager, 1987). Finally, and in contrast to final offer price ‘determinations’, initial investor returns strongly anticipate post-IPO earnings drift.
This study examines the relationship between initial public offer (IPO) corporate governance, IPO pricing and possible contextual relevance. A comprehensive inventory of IPO governance attributes is modelled. A positive association is reported between the inventory and IPO initial returns. This relationship is attenuated for IPOs where a diminished price relevance of governance structure is posited: smaller scale firms and/or those with alternative monitoring agents in place. Relevance appears modified and even supplanted by particular corporate priorities or the presence of other monitoring mechanisms. These contexts inform the motivation of key players regarding whether and how to act in response to the governance signal.
The present empirical investigation is an addition to the existing extant literature available on the issue of initial public offering (IPO) which sees its inherent anomaly of underpricing by linking it to some of under-researched dimensions of corporate governance in the emerging economy of India. This study incorporates about 443 Indian IPO firms with their board composition and ownership retained by promoter group post IPO being primary variables of focus which are obtained from respective prospectuses of such firms. Like many previous studies, this study also keeps signalling theory as base, and findings show that only interlocking of directors among all the board variables has a significant and negative relation with underpricing. Significant relation of ownership concentration in hands of promoter group with underpricing shows that it is considered as a signal by investors assisting them in gauging safety of their minority interests. Findings show that too high insiders’ ownership alignment of interest between promoters and minority holders turn into risk of entrenchment by initial investors, that is, promoters as perceived by investors.
Most of major shareholders, known as promoters of the firms, are subject to lock-up ratio for a certain period, following their company’s IPO listing. Interestingly, the lock-up ratio among firms vary, suggesting that it serves as a signalling tool to minimize potential conflicts between insiders and uninformed investors. This article investigates the influence of two main factors, that is, underwriter reputation and market capitalization on lock-up ratios. The regression results show that market capitalization, a proxy for firm size, tends to have a positive impact on lock-up ratio while the effect of underwriters’ reputation is weak. The findings also indicate that large firms with quality underwriters (proxied using the interaction of market capitalization and underwriter reputation) have lower information asymmetry and risk, and, therefore, are associated with higher lock-up ratios.
The present research article is an attempt to add something new and revalidate the influence of already existing corporate governance dimensions related to the board of directors on listing-day performance of the Indian initial public offering (IPO) firms measured through underpricing. Like other emerging market economies, firms in the Indian economy are also characterized by concentrated ownership held by an owner or a promoter in the context of the Indian corporate environment. In the backdrop of this concentrated complex ownership structure, the present study analyses the influence of the board of directors on underpricing when the appointment of such directors is largely an affair handled by such owners, whom they are given the task to monitor. The sample consists of 471 IPO firms which went public during the time period from January 2003 to December 2017. Results obtained from the regression analysis show that the board size and board committees act as information signals for Indian IPO firms having a significant and negative relation with listing-day initial excess returns. Other board-related dimensions of governance do not have significant influence on underpricing. Overall board variables have a very miniscule contribution in explaining the underpricing in Indian IPO firms.
We provide new empirical evidence that certain institutional investors have private information that they use to profit from initial public offerings (IPOs). In this study, we analyze the bidding information related to five types of institutional investors in China’s ChiNext market to examine the impact of private information and investor sentiment on first-day IPO returns. The results show that private information and institutional investor sentiment are positively correlated with initial returns. The analysis of the different institutional sectors shows that some securities companies may profit from IPOs by using private information. It was also found that qualified foreign institutional investors (QFII) may be at an informational disadvantage on the Chinese stock market.
Purpose: The purpose of this paper is to examine the impact of Shariah-compliant status on oversubscription of initial public offerings (IPOs) in Malaysia. It is believed that the Shariah-compliant status serves as a platform that sends a credible signal to investors which could possibly explain the IPO oversubscription anomaly. Design/methodology/approach: This study used a multivariate and quantile regression model which involved 252 IPOs listed on Bursa Malaysia from 2005 to 2015. Findings: The results show a significant positive relationship between Shariah-compliant status and oversubscription ratio, which suggests that companies with Shariah status could draw the attention of the investors. Strict guidelines and permissible elements of Shariah-compliant are considered agreeable and amicable by the investors. Research limitations/implications: Future studies should look into financial ratio benchmark (cash and debt) for determining Shariah-compliant status to enhance the understanding of oversubscription of IPOs in Malaysia. Practical implications: This study offers practical understanding to the issuers and underwriters on the factors that should be considered in assuring a good early performance of their issuance. Therefore, it will benefit the issuers and underwriters in managing and planning the IPO process carefully. Social implications: The results of this study provide a new insight for investors regarding important information found in the prospectus when making the decisions to subscribe to IPOs. Originality/value: This paper is one of the first to provide an empirical evidence of the impact of Shariah-compliant status on oversubscription in the IPO market.
Initial Public Offering (IPO) is an important and widely popular research topic among many researchers in finance discipline. This study is prepared to identify the connection among various empirical studies and theories regarding underpricing of IPO in the stock market of Bangladesh. We have chosen the time frame of June 2011 to June 2016 at DSE to conduct the research. In this study, ordinary least square (OLS) regression method is used to identify in what extent the dependent and the independent variables are related in the level of underpricing. The results of the study disclose that oversubscription rate, offer size have substantial influence in IPO underpricing at DSE. On the other hand, offer time and size of the firm do not have significant influence on the level of underpricing. These variables are very significant and play important roles with the level of underpricing at DSE and it shows relation to signaling theory, information asymmetry theory and agency cost theory.
This paper examines the impact of individual investors’ premarket and aftermarket sentiment on initial public offering (IPO) stock returns, based on 382 IPO firms in the Korean stock market from 2007 to 2014. The results reveal that individual investors’ premarket sentiment is significantly and positively related to the initial returns, as measured by the difference between the offer price and the first-day opening price. The findings also show that individual investors’ premarket sentiment is positively associated with their aftermarket sentiment, implying a spillover effect from premarket to aftermarket sentiment. However, after high initial returns in IPO firms with individual investors’ high premarket sentiment, we find subsequent underperformance; this is more pronounced in firms with high premarket and aftermarket sentiment. Overall, our results imply that individual investors’ premarket sentiment can largely explain IPO stock returns. Additionally, premarket sentiment followed by aftermarket sentiment can account for IPO stocks’ underperformance. Nevertheless, the impact of individual investor sentiment on IPO stock returns seems to be a short-term phenomenon, as high initial returns and subsequent underperformance are more evident within the first month after the IPO.
How do supply, demand and allocation of shares on the underpricing of initial public offerings (IPOs) affect the shape and steepness of supply and demand curves? Theoretical studies posit that subscribers ‘flip’ in IPOs immediately on the listing day to capture instantaneous profits. Consistent with this hypothesis, we find that both curves of the market listing day of IPOs are significantly negatively sloped with the supply curve being much steeper and above the demand curve. The excess demand that occurs during the subscription period becomes excess supply once the shares start to float on the listing day. Overall, we establish a strong empirical link between the underpricing puzzle and the aftermarket interaction of IPOs.
This study investigates the long-run pricing performance of 90 IPOs listed on the Karachi Stock Exchange from 1995 to 2010. This study finds evidence that IPOs show signs of underpricing and underperform over three years after listing; however, the observed pattern of underperformance is not always statistically significant. The equal-weighted buy-and-hold abnormal returns and calendar-time analysis confirm the significance of the IPO underperformance over the three year period after listing on the exchange. Extreme bounds analysis is used to test the sensitivity and robustness of twenty six explanatory variables in determining the IPO underperformance. The results reveal that the robust predictors of IPO underperformance include underpricing, financial leverage, age of the firm and oversubscription for buy-and-hold return calculations and underpricing, hot activity period, post issue promoters' holding, issue proceeds and aftermarket risk level for cumulative abnormal return calculations. Moreover, the fads hypothesis and the window of opportunity hypothesis are applied to explain long-run IPO performance.
In this paper we analyze the underpricing of Private Equity/Venture Capital backed IPOs on the Warsaw Stock Exchange between 2003 and 2011. Although the average initial return was positive (11.4%), it was significantly smaller than for other IPOs (14.5%). These results may support theories that PE/VC funds reduce information asymmetry between IPO investors and pre–IPO owners of the company or certification role of the PE/VC funds. At the same time our data do not give any evidence for the grandstanding or spinning hypotheses. Medium and long– term abnormal returns (1–month, 3–month and 1–year) on average are negative. In general, the more time elapses from the offer day, the lower the return from the PE/VC backed IPO investment. This data suggests that PE/VC funds do not perform any certification role.
The article examines the long-run performance of 377 initial public offerings (IPOs) made by Indian companies during the period 2005–2015. The objectives of the article are to analyze whether Indian IPOs underperform or outperform the broad market in the long run and to identify the key determinants of their long-run performance. The results show that the Indian IPOs outperform the broad market initially followed by significant underperformance in the long run. The IPOs listed on the main board during 2005–2015 yielded average initial excess returns (IERs) of about 22 per cent. However, 37 per cent of the IPOs provided negative IERs. The IPOs underperformed the broad market generating –57.33 per cent buy-and-hold abnormal return (BHAR) over 36 months after listing. Only 38 out of 377 IPOs (10 per cent) outperformed the benchmark index over a 36-month holding period. The important issue characteristics that influence the long-run performance of IPOs in India are the type of issuer (government-owned or private), lead manager prestige (LMP), promoter holding and the issue size.
Evidence suggests that IPO firms have negative returns and declining growth opportunities in the years post listing. We explore whether lockup type influences such returns and growth opportunities. Specifically, we investigate long run returns and growth opportunities of mandatory and non-mandatory lockup firms. We find that long run returns (growth opportunities) for mandatory lockup firms are significantly lower (higher) than for non-mandatory lockup firms. Examining the influence of corporate governance on these associations, we find that good corporate governance is positively associated with long run returns for both lockup type firms, with the differential effect insignificant. We also find that the listing survival rate of mandatory lockup firms is higher than for non-mandatory lockup firms. Further analysis reveals that the incremental effect of smaller firm size on higher growth opportunities is stronger for mandatory lockup firms relative to non-mandatory lockup firms.
Using hand-collected data on all IPOs in Korea from 2001 to 2007 before the global financial crisis, we find that institutional investors’ favorable valuation increases the offer price and initial returns. In particular, when institutional investors’ weighted average bidding price (WAP) increases by 1%, the offer price increases by 0.81%. A higher WAP predicts higher initial returns. While oversubscription ratios yield positive effects on offer prices and predict higher initial returns, their effects are weaker when IPO market conditions or WAP are included in the regression equations. These results suggest that institutional investors’ bidding prices reflect their private valuations of firms more than their oversubscription ratios. In addition, for predicting initial returns, institutional investors’ bidding information outperforms the revised offer price.
Issues of social justice underlie the clamour for greater gender balance in top-management. The present study reveals that pursuit of such social justice is also value-enhancing in relation to the longer-run performance of initial public offerings (IPO) stocks, especially where female board members are unencumbered by family-connection with other directors. This study examines the economic benefits of board gender diversity for state- and privately controlled firms in the Hong Kong IPO market. Gender board diversity is much less common in state-run IPO firms. Within the subset of privately controlled IPO firms, distinction exists between entities that accommodate family-connected board officers and those that do not. Specifically, this study focuses on family-ties between board members. This issue allows for finer-grained assessment of family influence on firm performance. Stronger post-listing stock, return-on-assets and sales-on-assets performance arise in (1) privately controlled firms without family-connected board members and in (2) state-run entities. Gender diversity thus serves as a positive, but only when female director presence is untrammelled by family associations between directors. However, there is little evidence of a link between female board representation and IPO underpricing. Relative to state-backed issuers, privately controlled firm boards accommodate more women, younger officers and a broader mix of nationalities, but appear more-inclined to unify CEO and chair positions. Board duality, the fraction of independent directors and directors’ age and nationality exhibit little relation with initial and aftermarket stock returns. In prescriptive terms, minority investors gain from the inclusion of female directors, especially when IPO firm directors are unencumbered by family-affiliation with other board members. Results therefore add to the clarion of calls for greater female board presence.
The oversubscription ratio of IPO prior to listing is an anomaly in countries that employed fixed price mechanism. According to the signaling theory argument, IPOs of good quality attract subscription from investors. An analysis was made to observe whether IPOs with growth opportunity (good quality) account for oversubscription. Using multivariate regression, it is found that there is a significant negative relationship between growth opportunity and oversubscription ratio. A significant negative coefficient of growth opportunity suggests that companies with high growth opportunity tend to have low risks and are not overly subscribed by investors as they provide low initial returns.
This paper classed the investors in the primary market to arbitragers and noise traders, then analyzed the return of the investors from the primary market under the system of cash rationing in China. The results suggest that the arbitragers can work with changing their demand, but the effect of the arbitragers is limited by the demand of the noise traders. When the noise demand is less than the issue volume, the quantity arbitrage is perfect and the offering price is underpriced, but the investors can just earn the normal return and the rule of restricted price has no effect. When the noise demand is more than the issue volume, the quantity arbitrage is limited and the offering price may be overpriced, and the investors will get a negative abnormal return if the offering price is lower than the given value which is lower than the intrinsic value.
Since October 1989, Standard and Poor's has (when possible) announced changes in the composition of the S&P 500 index one week in advance. Because index funds hold S&P 500 stocks to minimize tracking error, index composition changes since this date provide an opportunity to examine the market reaction to an anticipated change in the demand for a stock. Using post-October 1989 data, the authors document significantly positive (negative) postannouncement abnormal returns that are only partially reversed following additions (deletions). These results indicate the existence of temporary price pressing and downward-sloping long-run demand curves for stocks and represent a violation of market efficiency. Copyright 1997 by University of Chicago Press.
Are IPOs underpriced? Forthcoming in Review of Financial Studies
Purnanandam, A., and B. Swaminathan, 2002, Are IPOs underpriced? Forthcoming in Review of
A simple model is developed in the paper in which two market conditions change over time: (i) investor sentiment or price-insensitive demand; and (ii) feedback trader risk or the propensity of investors to chase trends. The model shows that these conditions partially explain the three anomalies associated with the IPO market: (i) underpricing; (ii) windows of opportunity for new issues and (iii) long-term underperformance. The model is tested using a sample of firm commitment IPOs over the 1975-1987 period. The paper finds that the predictions of the model are largely borne out in the data. on a previous draft were very helpful as were comments of participants in seminars at the University of North Carolina at Chapel Hill, INSEAD, the NBER Spring 1993 Corporate Finance meeting, and VPI. We thank Andrew Curtis for helpful research assistance.
Since September, 1976, stocks newly included into the Standard and Poor's 500 Index have earned a significant positive abnormal return at the announcement of the inclusion. This return does not disappear for at least ten days after the inclusion. The returns are positively related to measures of buying by index funds, consistent with the hypothesis that demand curves for stocks slope down. The returns are not related to S & P's bond ratings, which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock.
This paper presents a model for the underpricing of initial public offerings. The argument depends upon the existence of a group of investors whose information is superior to that of the firm as well as that of all other investors. If the new shares are priced at their expected value, these priveleged investors crowd out the others when good issues are offered and they withdraw from the market when bad issues are offered. The offering firm must price the shares at a discount in order to guarantee that the uninformed investors purchase the issue.
We argue that when the offer price of an initial public offering (IPO) is set many days before the issue closes for bidding by investors, relevant price information leaks and becomes public knowledge before investors have finished bidding for firm's shares. Consequently, there are instances when all investors realize ex ante that the offer price is 'too low' and we observe a large oversubscription for the firm's shares, as well as instances when the investors realize that the offer price is 'too high' and the issue fails. If failure is costly, then the offering is underpriced in order to reduce the likelihood that the issue will fail. This is in addition to the underpricing, as suggested in Rock (1986), to compensate the uninformed investors for the adverse selection problem they face in the allocation of shares. Our argument thus explains why underpricing may be larger in situations when there is information leakage. We further argue that if the issuer collects the interest float on checks deposited by investors for shares they bid, this interest revenue reduces the cost associated with underpricing and thus provides an incentive to underprice the issue further. Our analysis explains some stylized facts about differences in oversubscription and underpricing across countries and allows us to explore some empirical and policy implications. For instance, we show that the method used in the United Kingdom and in most Asian countries may lead to more underpricing and more extreme levels of oversubscription than the method used for firm commitment offerings in the United States.
We analyse initial and long-run returns for all Singapore IPOs made between 1 July 1973 and 31 December 1992. Initial returns are found to be around 30 percent. However, after rationing and application costs are taken into account initial returns are insignificantly different from the risk-free rate of return, a result consistent with the predictions of the model of Rock (1986). Initial returns are positively related to the level of oversubscription and retained ownership, although the economic significance of the latter is weak. In contrast to many other international studies of IPOs, the long-run average returns for Singaporean IPOs are insignificantly different from an efficient market expectation. While long-run returns for individual companies show considerable variation, these returns are not predictable using information available at the IPO date. We further investigate the large oversubscription rates which are a peculiar feature of the Singapore IPO market, and argue that they are consistent with demand expansion by informed investors. Our estimates of the minimum price that a rational issuer would set in an IPO are below the actual issue price for all issues, given what we regard as reasonable limits on uninformed demand.
Unique data availability and institutional arrangements for new issues in Singapore allow a direct test of the empirical implications of Rock's model of pricing unseasoned new issues. Our empirical results are consistent with the model. Specifically we find that the unseasoned new issues' anomaly disappears when the rationing associated with new issues is incorporated into the analysis. The winner's curse is evident in allocation patterns used in Singapore.
The paper investigates how quickly prices attain new equilibrium levels after large-block transactions, and measures the associated temporary and permanent price effects. We find that prices adjust within at most three trades, with most of the adjustment occurring in the first trade. The temporary price effect for seller-initiated transactions is related to block size, but the temporary price effect observed for buyer-initiated transactions is no larger than that observed in 100 share trades. Most of the price effect associated with block trades is permanent and is related to block size, regardless of the initiating party.
This paper documents that the relation of the final offer price to the range of anticipated offer prices disclosed in the preliminary prospectus is a good predictor of initial returns. Issues that have final offer prices which exceed the limits of the offer range have greater underpricing than all other initial public offerings, and are also more likely to increase the number of shares issued. These results are consistent with the pricing and allocation schedule proposed by Benveniste and Spindt (1989), in which shares in an offering are rationed and prices only partially adjust to new information.
We analyze the empirical power and specification of test statistics in event studies designed to detect long-run (one- to five-year) abnormal stock returns. We document that test statistics based on abnormal returns calculated using a reference portfolio, such as a market index, are misspecified (empirical rejection rates exceed theoretical rejection rates) and identify three reasons for this misspecification. We correct for the three identified sources of misspecification by matching sample firms to control firms of similar sizes and book-to-market ratios. This control firm approach yields well-specified test statistics in virtually all sampling situations considered.
Empirical evidence suggests the existence of ‘hot-issue’ markets for initial public offerings: in certain periods and in certain industries, new issues are underpriced and rationing occurs. This paper develops a model consistent with this observation, which assumes the firm itself best knows its prospects. In certain circumstances, firms with the most favorable prospects find it optimal to signal their type by underpricing their initial issue of shares, and investors know that only the best can recoup the cost of this signal from subsequent issues.
This paper discusses evidence on the short-run and long-run performance of companies going public in many countries. Differences in average initial returns are analyzed in terms of binding regulations, contractual mechanisms, and the characteristics of the firms going public. The evidence suggests that the move in recent years by most East Asian countries to reduce regulatory interference in the setting of offering prices should result in less short-run underpricing in the 1990s than in the 1980s. Evidence is presented that companies successfully time their offerings for periods when valuations are high, with investors receiving low returns in the long-run. Implications for investors, issuers, and regulators are discussed.
The paper studies both the initial and aftermarket performance (measured by risk-adjusted returns) on newly issued common stocks which were offered to the public during the 1960s. The results confirm that average initial performance is positive (11.4 percent), while the distribution of returns is skewed so that the subscriber of a single random new issue offering has about an equal chance for gain or loss. The results are generally consistent with aftermarket efficiency. Positive initial performance along with aftermarket efficiency indicate that new issue offerings are underpriced. The paper provides insights into this underpricing mystery, but does not solve it.
Determines the "hot issue" market of 1980 to result primarily from natural resource firms. The hot issue market extending from January 1980 to March 1981 is characterized by an average initial return of 48.4% on unseasoned new issues of common stock, as compared to the 16.3% average initial return of the cold issue period for the remainder of 1977-1982. To analyze the hot issue market, monthly average initial returns are calculated using 1977-82 data of SEC-registered initial pubic offerings as reported in Going Public: The IPO Reporter (1975-82), which continues Ibbotson and Jaffe's (1975) study of the previous 1960-76 period. An equilibrium phenomenon explanation is rejected, since when analyzed separately, startup natural resource-related firms saw a significant boom in returns - 110.9% as compared to 18.3% in the cold issue period - whereas a hot issue market is barely perceptible in other markets. The possibility that the hot issue market resulted from a high percentage of underpriced high-risk offerings, according to Rock's (1982) model, is also rejected, since the data shows that natural resource issues had the same relation between risk and expected initial return as did non-natural resource issues during the cold issue market, and then dramatically increased in the hot issue market. Thus, the explanation lies in a nonstationarity in the risk-initial return relation for natural resource firms, and points to differing activity by market segment. This study implies that the best time for issuing firms to go public is during the unstable, high-volume period immediately following a hot issue market for their industry. (CJC)
We analyze a unique dataset that includes the full demand schedules of 27 Israeli IPOs that were conducted as nondiscriminatory
(uniform price) auctions. To the best of our knowledge, this is the first time the whole demand schedule for any asset is
described. The demand schedules are relatively flat around the auction clearing price: The average elasticity is 27. The elasticity
is low when the return distribution contains a large unique component. We also find a significant average abnormal return of 4.5% on the first trading day and a positive correlation
between the abnormal return and the elasticity of demand.
We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective on the literature is three-fold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from non-rational and agency conflict explanations. We describe some promising such alternatives.
We examine the institutional bids submitted under the bookbuilding procedure for a sample of international equity issues. We find that information in bids which include a limit price, especially those of large and frequent bidders, affects the issue price. Oversubscription has a smaller but significant effect for IPOs. Public information affects the issue price to the extent that it is reflected in the bids. Oversubscription and demand elasticity are positively correlated with the first-day aftermarket return, and demand elasticity is negatively correlated with aftermarket volatility. Our results support the view that bookbuilding is designed to extract information from investors. Copyright (c) 2003 by the American Finance Association.
We analyze tests for long-run abnormal returns and document that two approaches yield well-specified test statistics in random samples. The first uses a traditional event study framework and buy-and-hold abnormal returns calculated using carefully constructed reference portfolios. Inference is based on either a skewness-adjusted "t"-statistic or the empirically generated distribution of long-run abnormal returns. The second approach is based on calculation of mean monthly abnormal returns using calendar-time portfolios and a time-series "t"-statistic. Though both approaches perform well in random samples, misspecification in nonrandom samples is pervasive. Thus, analysis of long-run abnormal returns is treacherous. Copyright The American Finance Association 1999.
The underpricing of initial public offerings that has been widely documented appears to be a short-run phenomenon. Issuing firms during 1975-84 substantially underperformed a sample of matching firms from the closing price on the first day of public trading to their three-year anniversaries. There is substantial variation in the under performance year-to-year and across industries, with companies that went public in high-volume years fairing the worst. The patterns are consistent with an initial public offering market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these "windows of opportunity." Copyright 1991 by American Finance Association.
Initial public offerings of common stocks are typically underpriced . In this paper, the author develops and tests the hypothesis that underpricing serves as a form of insurance against legal liabili ty and the associated damages to the reputations of investment banker s. The empirical results, based on samples of initial public offering s of common stocks that were brought to the market before and after t he Securities Act of 1933, provide considerable support for the impli cit insurance hypothesis. Specifically, gross underpricing and market segmentation between prestigious and fringe investment bankers in or iginating unseasoned new issues appear to be peculiar to the post-193 3 era. Copyright 1988 by American Finance Association.
Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
I assess the role of wealth and systemic risk in explaining future asset returns. I show that the residuals of the trend relationship among asset wealth and human wealth predict both stock returns and government bond yields. Using data for a set of industrialized countries, I find that when the wealth-to-income ratio falls, investors demand a higher risk premium for stocks. As for government bond returns: (i) when they are seen as a component of asset wealth, investors react in the same manner; (ii) if, however, investors perceive the increase in government bond returns as signalling a future rise in taxes or a deterioration of public finances, then investors interpret the fall in the wealth-to-income ratio as a fall in future bond premia. Finally, I show that the occurrence of crises episodes (in particular, systemic crises) amplifies the transmission of housing market shocks to financial markets and the banking sector.
This study does not support the view that a large number of shares can be sold at the prevailing market price and at a small cost. A significant stock price decrease is observed at the initial announcement of secondary distributions. The price declines are greater for offerings by officers and directors and for larger offerings, but are significant for all types of sellers and for large and small offerings. There is no significant price decline at the offering when secondaries are announced in advance. Underwriting and other selling costs are substantial and are positively related to relative offering size.
The authors investigate the long-run underperformance of recent initial public offering (IPO) firms in a sample of 934 venture-backed IPOs from 1972 to 1992 and 3,407 nonventure-backed IPOs from 1975 to 1992. They find that venture-backed IPOs outperform nonventure-backed IPOs using equal weighted returns. Value weighting significantly reduces performance differences and substantially reduces underperformance for nonventure-backed IPOs. In tests using several comparable benchmarks and the Fama-French (1993) three factor asset pricing model, venture-backed companies do not significantly underperform, while the smallest nonventure-backed firms do. Underperformance, however, is not an IPO effect. Similar size and book-to-market firms that have not issued equity perform as poorly as IPOs. Copyright 1997 by American Finance Association.
This study analyzes the effects of changes in S&P 500 index composition from January 1986 through June 1994, a period during which Standard and Poor's began its practice of preannouncing changes five days beforehand. The new announcement practice has given rise to the 'S&P game' and has altered the way stock prices react. The authors find that prices increase abnormally from the close on the announcement day to the close on the effective day. The overall increase is greater than under the old announcement policy, although part of the increase reverses after the stock is included in the index. Copyright 1996 by American Finance Association.
This paper examines the returns earned by subscribing to initial public offerings of equity. K. Rock (1986) suggests that initial public offerings of equity returns are required by uninformed investors as compensation for the risk of trading against superior information. The authors show that initial public offerings of equity with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of "informed" activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with initial public offerings of equity that have lower returns. Copyright 1990 by American Finance Association.
This paper develops a signaling model with two signals, two attributes, and a continuum of signal levels and attribute-types to explain new issue underpricing. Both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable "intrinsic" value of the firm and the variance of its cash flows. Many of the model's comparative statics results are novel, empirically testable, and consistent with the existing empirical evidence on new issues. In particular, the degree of underpricing, which can be inferred from observable variables, is positively related to the firm's postissue share price. Copyright 1989 by American Finance Association.
This paper examines underwriters' pricing errors and the information content of first-day trading activity in IPOs. We show that first-day winners continue to be winners over the first year, and first-day dogs continue to be relative dogs. Exceptions are "extra-hot" IPOs, which provide the worst future performance. We also demonstrate that large, supposedly informed, traders "flip" IPOs that perform the worst in the future. IPOs with low flipping generate abnormal returns of 1.5 percentage points per month over the first six months beginning on the third day. We show that flipping is predictable and conclude that underwriters' pricing errors are intentional. Copyright The American Finance Association 1999.
Companies issuing stock during 1970 to 1990, whether an initial public offering or a seasoned equity offering, have been poor long-run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a seasoned equity offer. Book-to-market effects account for only a modest portion of the low returns. An investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date. Copyright 1995 by American Finance Association.
The author presents a signaling model in which high-quality firms underprice at the initial public offering in order to obtain a higher price at a seasoned offering. The main assumption is that low-quality firms must invest in imitation expenses to appear to be high-quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high-quality firms at the initial public offering then adds sufficient signaling costs to these imitation expenses to induce low-quality firms to reveal their quality voluntarily. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital after their initial public offering. Copyright 1989 by American Finance Association.
Develops a theory for the demand for the advising and distribution services of investment banks when there is information asymmetry between an issuer of new securities and the investment bankers. The advising services of the investment banker are valuable when the banker has better information about the capital market, while the distribution services are useful when the banker is able to create demand for the issue. This analysis considers the delegation contract between the issuer and the banker in a negotiated, fixed price offering. The delegation contract exists when the issuer enlists the banker to both advise on the offering price and distribute the securities. In this case, the banker's decision as to whether the contract should be accepted is based on the banker's private information. Given these conditions, a model is presented, and an example is provided to illustrate the optimal delegation contract. Also examined are the situation in which the issuer only utilizes the distribution services of the banker and the situation in which the investment banker is not engaged at all. Results show that when the banker is better informed than the issuer, the new issues are underpriced. Further, those issuers of unseasoned securities who are less informed about the capital market than the issuers of seasoned securities are more likely to seek the advice of investment bankers. (SRD)
We analyze 52 Taiwanese IPOs that were conducted as discriminatory auctions (you pay what you bid) between December 1995 and October 1998. This unique dataset, which complements the Kandel, Sarig, and Wohl (1999, KSW) nondiscriminatory (uniform-price) IPO auction dataset in Israel, includes the whole demand schedules. To the best of our knowledge, it is the first time that the whole demand schedules for discriminatory auctions are described and analyzed. Consistent with KSW, the elasticity of demand for IPOs in Taiwan is relatively flat at the auction clearing price. This appears to imply that the high elasticity of demand for IPOs may not be affected by auction methods. In addition, our unique data allow us to test three hypotheses that appear to explain the cross-sectional variation of demand elasticity. The shareholder heterogeneity hypothesis suggests that the demand elasticity is negatively correlated with the heterogeneity in demand, while the competition hypothesis predicts that the demand elasticity is positively correlated with competition. The synthesized hypothesis proposed in this paper suggests that the demand elasticity is correlated more with competition than with heterogeneity for the winning bid schedules, whereas the relation is reverse for the losing bid schedules. Our results appear to be consistent with all three hypotheses. We also find that the average winning bidders earn a significant average abnormal return of 7.83% in the post-market and that the post-market abnormal return is positively correlated with the demand elasticity and the idiosyncratic risk of stock returns. Finally, there is evidence that informed investors have incentives to shade their demand in IPOs to avoid the winner's curse. The most aggressive bidders (the top 5% of the winning bidders) on average incur only a small loss of 1.64% (not significant) in the market-adjusted initial returns.
Our model of the initial public offering process links the three main empirical IPO ‘anomalies’ – underpricing, hot issue markets, and long-run underperformance – and traces them to a common source of inefficiency. We relate hot IPO markets (such as the 1999/2000 market for Internet IPOs) to the presence of a class of investors who are ‘irrational’ in the sense of having exuberant expectations regarding future performance. Underpricing and long-run underperformance emerge as underwriters attempt to maximize profits from the sale of equity, at the expense of these exuberant investors. Underpricing serves to compensate regular IPO investors for their role in restricting the supply of available shares and maintaining prices. The model is shown to be consistent with many aspects of the IPO process. It also generates a number of new empirical predictions.
: Recent studies have documented that firms conducting seasoned equity offerings have inordinately low stock returns during the five years after the offering, following a sharp run-up in the year prior to the offering. This paper documents that the operating performance of issuing firms shows substantial improvement prior to the offering, but then deteriorates. The multiples at the time of the offering, however, do not reflect an expectation of deteriorating performance. Issuing firms are disproportionately high-growth firms, but issuers have much lower subsequent stock returns thannonissuers with the same growth rate. The Operating Performance of Firms Conducting Seasoned Equity Offerings Several recent empirical studies have documented the poor stock market performance of firms conducting seasoned equity offerings (SEOs) in the United States and other countries. 1 Loughran and Ritter (1995) report that the average raw return for issuing firms is only 7 percent per year during th...