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Investor demand for IPOs and aftermarket performance: Evidence from the Hong Kong stock market

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Abstract

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. ...
... The results imply that the uninformed investors are somehow relied on allocation rate not only to assist them whether to participate or not in the IPO market but also as a guidance tool to improve their investment decision and performance. 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. ...
... But the existing research not fully explained what and how the private information signals affected on the overconfidence behavior. For example Agarwal et al. (2008) and Boussaidi (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. ...
Article
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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.
... 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. ...
... The results imply that the uninformed investors are somehow relied on allocation rate not only to assist them whether to participate or not in the IPO market but also as a guidance tool to improve their investment decision and performance. 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. ...
... 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) 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. ...
... 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). ...
... 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. ...
Article
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.
... It is shown in previous literature that IPO performance is influenced by the demand from investors (see Low and Yong, 2011;Ljungqvist et al., 2006;Cheng et al., 2005;Yong and Isa, 2003;Chowdhry and Sherman, 1996;Kandel et al., 1999;Lee et al., 1999). It is concluded from this literature that there is an association between IPOs with high demand and larger positive initial returns or higher level of underpricing ( Low and Yong, 2011;Agarwal, 2008). This shows the significant importance of investors' demand in the comprehension of IPO performance. ...
... This shows the significant importance of investors' demand in the comprehension of IPO performance. In addition, the more attractive an IPO is in the investors' point of view, the higher the demand for its new issues, along with higher initial returns on the day of IPOs listing ( Low and Yong, 2011;Agarwal, 2008). Moreover, an issuer would prefer IPOs as the funding mechanism which provides a firm with a number of advantages, such as an enhanced public image of the firm. ...
Article
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Purpose 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. Design/methodology/approach 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. Findings 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. Research limitations/implications 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. Practical implications 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. Social implications 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. Originality/value 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.
... 3 shows the relationship between trading volume and 3 years performance after IPO activity. Agarwal, Liu, and Rhee (2008) used trading volume as an investor demand reaction on offered stocks. In the other said, the more trading volume means the investor overreaction demand on offered stocks. ...
... The relation of trading volume on long-run performance is negatively significant, it means high investor demand on underpriced stocks exacerbates the long-run performance of its stocks. This results consistent with the other previous research (Agarwal, Liu, and Rhee, 2008). Table. 2 and Table. ...
Article
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Study on a phenomenon of underpricing and the declining performance of underpriced stocks are still unresolved. This research explains the causation of underpricing and it performance at a long time later. The results of this study confirm the behavioral finance theory on the dynamic capital market, especially confirm Overreaction Hypothesis (OH) on Initial Public Offering (IPO) activity. Underpricing at IPO activity caused by the overconfidence of investor, in which it behavior stimulate the overreaction investor's demand on offered stocks. The high demand for stocks will increase stocks' price above it intrinsic value. Therefore, it the price will be corrected in a long time later, it is proven by the declining long-run performance of underpriced stocks.
... 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. ...
Article
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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.
... 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. ...
Article
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The purpose of this study was to empirically investigate initial public offering underpricing and to investigate the determinants of IPOs listed at Pakistan stock exchange during the period from January 2000 to December 2010. The study found that underpricing phenomenon exists in KSE 100 index to reduce the level of uncertainty between the informed and uninformed investors at the time of IPO. The sample data on 59 IPO firms was collected and Market Adjusted Abnormal Returns Model (MAAR) has been employed to measure the post-IPO performances of the new issues. The results of this study are in line with the literature on IPO anomalies stating that underwriters deliberately underpriced the IPOs to a degree of 46% on average.
... 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). ...
Article
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High-quality issuing firms with encouraging inside information regarding their prospect will use signalling to differentiate their issues from low-quality issuing firms and convince prospective investors regarding the value of their firm. Hence, the present study investigates the dominant signals in explaining the initial return in the Malaysian IPO market. The study investigates the following signalling variables: Lock-up period, shareholder retention ratio, underwriter reputation, auditor reputation and board reputation. Moreover, the current study also uses the stepwise regression analysis to know the order of contribution of the signalling variables to the overall model. The results of the regression analysis show that three signals out of five have a significant relationship with the initial return. Furthermore, the stepwise regression shows their order of contribution, where shareholder retention ratio is ranked first, followed by auditor reputation and board reputation. The outcomes of the present study offer new evidence regarding the kind of information that investors should be concerned with when evaluating IPOs and making decisions concerning investment in the Malaysian IPO market. © Asian Academy of Management and Penerbit Universiti Sains Malaysia, 2018.
... 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). ...
Article
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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.
... The asterisks *** , ** and * signifies significance at levels of 1%, 5% and 10%, respectively IPO valuation smaller portion of the existing shares for sale to the public, thus creating investors' demands for the IPO (Jain and Kini, 1994;Ritter and Welch, 2002). Moreover, a high investor's demands for an IPO (OSR) naturally creates additional pressure on market prices, resulting in higher underpricing (Abdul-Rahim and Yong, 2010;Aggarwal et al., 2008). Besides, the positive coefficient of market return (MKTCON) indicated high initial returns if IPOs are listed in a bullish market. ...
Conference Paper
The pricing of IPOs not only refers to the ability of underwriters to gauge the demand for shares but more importantly, is used as a quantitative model to estimate firms’ true values. This paper examines the usefulness of the price-multiples methods in valuing 467 Malaysian fixed-price and book-built IPOs between 2000 and 2017. The findings of the study suggest that IPOs price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S) are positively related to the median P/E, P/B and P/S multiples of five comparable firms matched by industry and revenues. Additionally, the P/S multiple approach is shown to be the most important valuation method, specifically in book-built IPOs. The findings of this study have implications for underwriters in reducing mis-valuations by incorporating book-building in IPOs, which will invariably result in greater accuracy of valuations. Furthermore, investors may consider the P/S multiple to estimate firms’ true values before investment.
... In the current study, information asymmetry inherent in an IPO exercise is controlled using firm size as a proxy, which is calculated by multiplying the offer size of the issues with the closing price of the first-day of listing (Chahine et al. 2011;Chambers & Dimson 2009). 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. ...
Article
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Purpose 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. Design/methodology/approach 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. Findings 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. Originality/value This is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.
... According to Yung and Zender (2010), the offer size can reflect the issuing firm's value, thus it can be used to construct a proxy to reflect the level of information asymmetry. The size-based sorting approach had been used by Agarwal, Liu, and Rhee (2008), while using company size as a proxy for information asymmetry had been utilised by Beatty and Ritter (1986), Barclay and Smith (1995), and Goergen, Renneboog and Khurshed (2006). They argued that company size is suitable because younger and smaller firms tend to be exposed to greater uncertainty. ...
Article
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Manuscript type: Research paper Research aims: This study examines the effect of information asymmetry on the relationship between the signalling variables and the initial returns of IPO. The signalling variables examined include lock-up period, underwriter reputation, auditor reputation, and board reputation. This study also examines the ability of signalling variables in reducing information asymmetry (the average first ten days of Bid/Ask spread is used as proxy for information asymmetry) around listing firm's issues. Design/Methodology/Approach: This study employs cross-sectional regression model to examine the influencing effect of information asymmetry on the relationship between signalling variables and initial returns of IPOs, and to investigate which of the signals are able to reduce the level of information asymmetry surrounding the listing firm's issues in the Malaysian IPO market. The study sample consists of 393 IPOs IPOs when in an environment of high information asymmetry. Evidence also indicates that board reputation is able to reduce the underpricing cost borne by listing firms by lowering the level of information asymmetry regarding the listing firm's issues. Underwriter reputation is able to reduce the level of information asymmetry regarding listing firm's issues, but unable to influence the initial returns of IPOs. Further, auditor reputation is able to reduce the underpricing cost, but unable to reduce the level of information asymmetry regarding the listing firm's issues. Finally, lock-up period is unable to reduce the level of information asymmetry as well as underpricing with regards to the listing firm's issues. Theoretical contribution/Originality: The effect of information asymmetry on the relationship between signalling variables and initial returns, and the effect of signalling variables on information asymmetry remains unexplored in the Malaysian IPO market. This gap is addressed by the current study. Practitioner/Policy implication: The findings imply that underwriter reputation, auditor reputation, and board member reputation are important for determining the initial returns of the IPOs. They are also important for reducing the level of information asymmetry surrounding the listing firm's issues. Therefore, it is reasonable to suggest that information regarding these signals be disclosed completely to investors since current disclosure practices in Malaysia only embed fragmented information. Research limitation/Implications: In the present study, the Bid/ Ask spread is used as proxy for information asymmetry. Future studies should consider other indicators such as the heterogeneity of investors' opinion on the true value of the listing firm's issues. This is because the fixed price method provides no opportunity for prospective investors to reflect on their expectations and beliefs on the IPOs' issue price. As such, the fixed-price offering will have higher divergence of opinions among investors when compared to other pricing mechanisms such as the book-building method.
... Underpricing potentially endangers growth financing due to the reduction in capital inflow. Overpricing correlates with a weak demand of investors, leading to a potential withdrawal from IPOs (Agarwal, Liu, & Rhee, 2008). A differentiated analysis of the influencing factors relevant to IPO returns and their significance in different markets is pertinent for the choice of location and timing of a new issue for companies and investors due to the potentially different indirect costs. ...
Article
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In their studies, Loughran, Ritter, and Rydqvist (1994), Fan, Wong, and Zhang (2007), Chi and Padgett (2005) as well as Ritter (1991) show differences in the regional characteristics of underpricing and overpricing in initial public offerings (IPOs). Our study analysis the regional differences in the influencing factors of underpricing or overpricing based on a systematic literature review that is focused on the Chinese and the U.S. capital markets. Therefore, following the systematic literature review protocol, it was possible to select 38 papers published between 1988 and 2019. Our results show that stock market-specific factors are crucial for regional differentiation. Results on the correlation between stakeholder-and issuance-specific factors are at least partially contradictory. The uniformly identified correlations of stakeholder and issuance factors diverge only slightly in both markets. The investigation of the influencing factors mentioned in the studies also reveals the causal relationship that the IPO return phenomenon of underpricing is influenced by site-exclusive and site-independent factors, whereas overpricing is primarily influenced by site-independent factors. We thus close an existing research gap and satisfy an important information need of issuers and investors.
... The asterisks *** , ** and * signifies significance at levels of 1%, 5% and 10%, respectively smaller portion of the existing shares for sale to the public, thus creating investors' demands for the IPO (Jain and Kini, 1994;Ritter and Welch, 2002). Moreover, a high investor's demands for an IPO (OSR) naturally creates additional pressure on market prices, resulting in higher underpricing (Abdul-Rahim and Yong, 2010;Aggarwal et al., 2008). Besides, the positive coefficient of market return (MKTCON) indicated high initial returns if IPOs are listed in a bullish market. ...
Article
Purpose This study aims to investigate the valuation accuracy of Malaysian initial public offerings (IPOs) by using price-multiple methods. Design/methodology/approach Cross-sectional data including 467 IPOs listed on the Malaysian stock exchange were used for the period of 2000–2017. This study used univariate ordinary least square (OLS) regression to analyse the relationship between IPOs’ price-multiples and comparable firms’ price-multiples. The test of valuation accuracy was conducted via computing valuation errors by segregating the sample into two groups: fixed-price IPOs and book-built IPOs. Furthermore, multiple OLS regression was used to examine the influence of IPO valuation on underpricing. Findings The findings of the results suggested that IPOs price-to-earnings (P/E), price-to-book (P/B) and price-to-sales (P/S) multiples were positively related to the median P/E, P/B and P/S multiples of five comparable firms matched by industry and revenues. The P/S multiple was shown to be the most significant valuation method, specifically in book-built IPOs. The findings indicated that those firms that had a lower valuation in comparison to the comparable firms were inclined to underprice their IPOs to allure investors to subscribe IPOs. In addition, book-built IPOs that had fair valuations were inclined to generate higher initial returns for investors. Practical implications The findings of this study observed implications for underwriters in avoiding the mis-valuation issue by considering the book-building mechanism. Originality/value This study attempted to explore the suitability of the valuation method to value IPOs in Malaysia.
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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.
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Research on IPOs commonly focuses on the relation between firms’ pre IPO ownership structure and subsequent stock performance. We extend the literature by additionally focusing on companies’ post IPO ownership structure, in particular, private equity capital engagement, to analyse IPOs stock performance matters. For this purpose, we employ a unique dataset on German IPOs from 2004 to 2014 that allows us to identify companies’ ownership structures before and after the IPO. We compute stocks’ market-adjusted returns and information ratios for the first 200 trading days to answer two research questions. First, do stocks of companies that were (partially) owned by private equity investors prior the IPO show a different performance after the IPO than stocks of companies without prior investments of private equity investors? Second, does the extent of private equity investors’ involvement at the IPO (i.e. their pre and post IPO shareholdings) influence the stock performance following the IPO? We do not find evidence that stocks of companies, which had private equity investors as shareholders prior to the IPO, outperform stocks of companies without private equity investors per se. However, for the subsample of companies that had private equity investors as shareholders, we document that the stronger the private equity investors reduce their engagement the stronger is the performance of the issued stock.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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.
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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.
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This study has examined the IPO performance in India from 2007 to 2013. Results show that under-pricing exists in the first day of trading during the particular period, but results show that the degree of under-pricing is dramatically decreased in comparison with what is shown in previous studies. The study finds that the IPOs are influenced by its issue variables. The face value of the shares and oversubscription subscription of the share are highly affected factor for underpriced in initial day of listing. After 36 months of listing the IPOs are underperformed by 29.06 percent and market capitalisation of the firm, issue premium of the share, face value of the share, issue price, and oversubscription of IPOs are highly influencing IPOs performance in long run. The study has considered 146 companies for identifying the factors influencing the Initial Public Offerings (IPO) in the Bombay Stock Exchange (BSE), India.
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This study investigates whether retail investor attention influences initial public offering (IPO) subscription and prices in Taiwan's economy, which features little information asymmetry because of its pre-IPO market. We find that IPO trading prices in a pre-IPO market increase with investor attention before IPO filing date. Our results support attention theory and indicate that retail investors naïvely subscribe to IPOs that attract their attention, whereas underwriters employ pre-IPO market trading information rather than investor attention to price IPOs. The trading price in a premarket is more valuable than is retail investor attention for IPO pricing.
Article
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.
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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.
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In this paper, we establish the significance and effects of initial public offer (IPO) offer price ranges on subscription, initial trading, and post-IPO ownership structures. The primary market in India provides a unique setting for estimating the effect of various initial public offer (IPO) price ranges and IPO issue factors on the initial demand for an IPO among investors, measured by full IPO subscription/oversubscription, initial turnover (liquidity), and the post-IPO listing ownership structure among investors (ownership). For the IPO pre-listing stage, this study uses firth logistic regression to estimate the effect of various IPO offer price ranges (low to high) and various IPO issue factors on the full subscription/oversubscription of an IPO in each investor category. For the post-IPO listing stage, the study uses OLS regression to estimate the effect of various IPO offer price ranges (low to high) and various IPO issue factors on the initial trading ratio (IPO listing day trading) and the ownership percentage between institutional and individual investors. We find that all investor categories show a lesser likelihood for full subscription or oversubscription of an IPO issue at the lowest range of IPO offer prices. At the post-listing stage, the results indicate a diverse IPO offer price range in which individuals and institutions maximize their respective ownership holdings after the IPO listing. The results further show that lower promoter holdings diffuse higher ownership among individual shareholders by targeting lower IPO offer prices, thus increasing control.
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We investigate the relationship between IPO long-run underperformance (Ritter, 1991; Loughran and Ritter, 1995) and the idiosyncratic risk puzzle (Ang, Hodrick, Xing and Zhang, 2006) or the phenomenon of abnormally low returns for stocks with high idiosyncratic risk. We find that IPO long-run underperformance is a manifestation of surprisingly low returns for high idiosyncratic risk stocks. IPO underperformance disappears after we control for idiosyncratic risk. On the other hand, we find that the idiosyncratic risk puzzle is magnified by IPO underperformance. Our results are robust to various specifications or sample requirements. We evaluate a couple of potential common causes for the two puzzles and conclude that investors’ preferences for stocks with lottery features is the primary mechanism linking the two puzzles.
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Book building has become a popular method of selling new shares. Although previous models suggest that book building is an efficient method for price discovery in initial public offering (IPO) issuance, empirical evidence provides mixed results. Previous empirical findings on IPO methods have been obtained from markets that allow issuers to choose the IPO method, and this setting is not free from endogeneity issues. We investigate the effect of IPO method (fixed price vs book building) in Indonesia, which is an emerging market that offers an exogenous setting for IPO methods. More specifically, Indonesia used the fixed price method for IPOs before October 2000 and used the book building method thereafter following the introduction of new IPO regulations. Using estimation methods that consider clustering phenomena, we find that book building yields larger underpricing and greater volatility than the fixed price method. Moreover, a positive relationship is observed between underpricing and aftermarket volatility for the book building method and book building IPOs underperform fixed price IPOs. No relationship was observed between underpricing and long-term performance for book building IPOs. Compared with previous models, our findings suggest that book building does not represent a quality IPO method and suffers from agency conflict; thus, this method needs improvement.
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Purpose Anchor investor (AI) regulation was introduced in 2009 by the Indian market regulator Securities and Exchange Board of India to facilitate the price discovery process during the book-building mechanism. This study aims to examine the aftermarket pricing performance of initial public offering (IPO) firms over the long-run period of up to 36 months after the listing date in the anchor investor regime. Design/methodology/approach The post-issue performance of 129 Indian IPOs issued from 2009 to 2014 is studied by using buy and hold abnormal returns, cumulative abnormal returns and wealth relatives approaches. This study presents the aftermarket performance indicators of Indian IPOs along with the comparative analysis between anchor-backed and non-anchor-backed IPO categories. Using multiple regression analysis, this study identifies the firm-level variables and issue characteristics that can explain long-term IPO performance. Findings This study reports that Indian IPOs continue to underperform in the long run in the anchor regulation era as well. However, anchor-backed IPOs are reported to underperform lesser than the IPOs not backed by anchor investment. Additionally, this study documents that the variables, i.e. offer size, grade, post-issue promoter holding and IPOs issued during hot IPO periods, are significant in explaining the 36-month aftermarket performance. Originality/value This study investigates the long-run aftermarket pricing performance of anchor affiliated IPOs in the Indian market context. Thus, it contributes to the limited primary markets’ research from emerging economies. Further, the results provide fresh evidence reaffirming the credibility of AI as an institutional investor for attestation of quality of the issues.
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Listing of a company in the securities exchange has been observed to be followed by underpricing in the first day and long term period of underperformance in terms of pricing in the subsequent days. Consequently, there has been a considerable curiosity from stakeholders, investors and academics to comprehend the assessments of why companies go public and the issues surrounding the short and long-run performance of newly issued equities. Underpricing is necessary to induce uninformed investors to participate in IPO offering when faced with adverse selection from informed investors. This often leads to first day price not reflecting a fair value of the IPO. The objective of the study was to determine the long-run performance IPOs and effects in the Kenyan stock market for the period 2007-2014. A descriptive survey research design was employed in the study. The population of the study encompassed all the 64 listed companies at the NSE as at 2016. The study employed a non-probability purposive sampling technique. Data collected for this study was secondary data obtained from NSE website, NSE price lists and the Central Bank of Kenya website for the period 2007 to 2014. The data obtained was analyzed using Statistical Package for Social Science (SPSS). Mean Average Buy and Hold Returns (MABHR), Abnormal Returns (AR) and Cumulative Abnormal Returns (CAR) were used to calculate the performance of the stocks. T-statistic for CAR was computed to the test for its significance. T-test was conducted at 95% confidence level to find if MABHR and CAR were statistically significant after IPOs announcement.
Article
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.
Article
Purpose This study investigated the effect of pricing mechanism and oversubscription on the heterogeneity of investors' opinions on initial public offering (IPO) valuation. Design/methodology/approach Besides the ordinary least square method, this study incorporated robust least square, stepwise least square and quantile regression methods to investigate the aftermarket behaviour of investors using the price range on the first day of trading of 82 IPOs listed on the Pakistan stock exchange. Findings The aftermarket behaviour of investors was found to be significantly influenced by the pricing mechanism, oversubscription, financial leverage, political stability and the risk of IPO, whereas control of corruption showed an insignificant impact. Concurrently, the findings showed that pricing mechanism and oversubscription played a crucial role in determining the intensity of investors' heterogeneous opinions at high levels of significance. Originality/value Pricing mechanism and oversubscription not only signal the quality of IPOs but also provide an important means for reducing the information asymmetry associated with new listings. Based on the literature review, it was found that both the pricing mechanism and oversubscription have yet to be explored in investigating the aftermarket behaviour of investors using the price range in the Pakistan IPO market. This study suggests that book building pricing mechanism and oversubscription are associated with lower heterogeneity in investors’ opinions at a high level of significance.
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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.
Article
Because of information asymmetry and agency costs associated with investment bankers, initial public offerings (IPOs) are severely underpriced in many countries. Furthermore, investors may sue the managers of an IPO firm if the stock trading price decreases after stock issuance. Therefore, to mitigate the litigation risk, IPO firms purchase directors and officers (D&O) liability insurance. This study proposes outcome and substitute models of D&O insurance risk avoidance to examine whether holding D&O insurance influences IPO pricing. The outcome model implies that firms purchase D&O insurance owing to directors' and officers' conservative stance and reluctance to take aggressive decisions. The substitute model implies that directors and officers are aggressive when they have D&O insurance. Our empirical results support the outcome model, which is based on information concerning retail subscription, suggesting that firms purchase D&O insurance because directors and officers are conservative. However, IPO firms under D&O insurance coverage become aggressive when making pricing decisions, as evidenced by the strong retail subscription; thus, the substitute model dominates.
Article
Purpose The unique regulatory design of India provides us with the opportunity to disaggregate traditional initial public offering (IPO) underpricing into three categories: voluntary, pre-market and post-market. The presence of anchor investors in India makes it a compelling case to study. These individuals were introduced to bring transparency in the book building process, but their impact on pre-market and post-market underpricing was not foreseen. Therefore, the purpose of this paper is to evaluate the impact of anchor investors on the IPO underpricing after disaggregation and on the long-run performance of an IPO. Design/methodology/approach A sample covering 232 IPOs from a period of 2009–2018 is included. The empirical analysis explores the impact of various firm-specific as well as market-specific variables on IPO underpricing. The financial data for the empirical analysis are extracted from Prime database and websites of National Stock Exchange and Bombay Stock Exchange. To deal with the outliers effectively, this paper deploys “robust-regression.” Findings The study finds that investor’s subscription rate and voluntary underpricing impacts the pre-market but do not have any impact on the post-market while the age of the firm has a different impact on both the markets and the number of anchor investors have the same impact in both markets. Anchor investors’ participation increases the pre-market as well as post-market underpricing. Lastly, the long-term performance of IPOs backed by the anchor investors is high relative to the IPOs not subscribed to by the anchor investors. Originality/value This paper is believed to be the first attempt to study the impact of anchor investors on the disaggregated IPO underpricing. The findings of this study will have a great insight for the investors.
Article
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.
Article
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.
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Purpose This study aims to investigate the effect of shariah status on initial public offering (IPO) underpricing, long-term performance and relationship between short-term and long-term IPO performance, and attempt to gain an insight into the nature of shariah IPO underpricing: a signal or an overreaction. Design/methodology/approach This study uses IPOs during 1990–2018 from Indonesia. This study uses clustered regressions to address clustering phenomenon in IPO. To investigate long-term performance, this study uses cumulative returns, cumulative abnormal returns and Fama–French three factor regressions. This study also runs cross-sectional regressions on the relationship between short and long-term performances. Findings This study finds that shariah status reduces lowers non-trading returns (return from offer to open prices), suggesting that shariah status may reduce information asymmetry and compensation. This study finds that both shariah and non-shariah IPOs underperform the benchmarks, with shariah IPOs underperform more. Further analysis shows a negative relationship between initial return and long-term performance for both shariah and non-shariah IPOs, whereas the negative relationship is stronger for shariah IPOs. The results indicate that shariah compliance help reduce information asymmetry; however, shariah compliance does not necessarily signal quality. Instead, shariah compliance seems to induce investor sentiment, resulting in underperformance and reversal patterns in the long run. Research limitations/implications The results have various implications. Issuers may use shariah screening to lower underpricing. Investors may manage their investment horizons to mitigate IPO underperformance. Future research is needed to understand the nature of short and long-term performance of shariah IPO across countries. The use of ex-ante shariah definition becomes our limitation. This study also does not use buy and hold return to investigate long-term performance. Practical implications The results have various implications. Issuers may use shariah screening to lower underpricing. The results show that sharia certification may play an important role in the IPO process. However, sharia status induces individual investors, leading to more overreaction in the long term. Thus, companies need to balance between sharia certification and overreaction in the long term. Investors may manage their investment horizons to mitigate IPO underperformance. Originality/value This paper extends studies on the effect of shariah status on IPO performance using Indonesia data. Using non-trading returns, this study provides sharper analysis on the underpricing study. This study shows that shariah status leads to an overreaction, instead of a signal for quality.
Article
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.
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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.
Article
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.
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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.
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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.
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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.
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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.
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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.
Article
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.
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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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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)
Article
We test the empirical implications of several models of IPO underpricing. Consistent with the winner’s-curse hypothesis, we show that in markets where investors know a priori that they do not have to compete with informed investors, IPOs are not underpriced. We also show that IPOs underwritten by reputable investment banks experience significantly less underpricing and perform significantly better in the long run. We do not find empirical support for the signaling models that try to explain why firms underprice. In fact, we find that (1) firms that underprice more return to the reissue market less frequently, and for lesser amounts, than firms that underprice less, and (2) firms that underprice less experience higher earnings and pay higher dividends, contrary to the models’ predictions.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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.
Article
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)
Article
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.
Article
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.
Article
The key idea of rational expectations models is to assume that people know (or behave as if they know) the true model that describes the economy. However, popular economic models (the models that are used by the broad masses of economic actors to form their expectations) are obviously not the same as those held by economists. This paper reports on data collection effort on popular models, using questionnaire survey methods, with the purpose of understanding speculative markets. I will report here on my research to understand the U.S. stock market crash of October 1987; research Fumiko Konya, Yoshiro Tsutsui, and I undertook to understand the Japanese stock market crash of October 1987; research Karl Case and I undertook to understand recent real estate booms; and research John Pound and I undertook to understand the periodic “hot” markets for initial public offerings (IPO's) of common stock.
Article
: 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...
Are IPOs underpriced? Forthcoming in Review of Financial Studies
  • A Purnanandam
  • B Swaminathan
Purnanandam, A., and B. Swaminathan, 2002, Are IPOs underpriced? Forthcoming in Review of Financial Studies.
The demand for stocks: an analysis of IPO auctions
  • Kandel