Regulations,earnings management,and post-IPO performance: The Chinese evidence

In this study, we examine whether government regulatory initiatives in China involving IPO by SOEs may have contributed to opportunistic behaviors by the issuer. We focus on two sets of IPO regulations issued between January 1, 1996 and February 11, 1999: pricing regulations, which stipulate that IPO prices be a function of accounting performance, and penalty regulations, which penalize IPO firms for overly optimistic forecasts. We find that IPO firms that report better pricing-period accounting performance have larger declines in post-IPO profitability, lower first-day stock returns and worse long-run post-IPO stock performance. Furthermore, IPO firms that make overoptimistic forecasts also have lower first-day returns and worse post-IPO stock performance. Using non-core earnings as the proxy for earnings management, we document some evidence that IPO firms that report higher pricing-period accounting performance have engaged in more income-increasing earnings management. Hence, pricing regulations may have induced IPO firms to inflate pricing-period earnings and affect the post-IPO performance negatively. On the other hand, penalty regulations have deterred IPO firms from making overoptimistic earnings forecast and therefore have a positive impact on the behavior of IPO firms.     

IPO first-day returns,offer price revisions,volatility, and form S-1 language

Form S-1 is the first SEC filing in the initial public offering (IPO) process. The tone of the S-1, in terms of its definitiveness in characterizing the firm’s business strategy and operations, should affect investors’ ability to value the IPO. We find that IPOs with high levels of uncertain text have higher first-day returns, absolute offer price revisions, and subsequent volatility. Our findings provide empirical evidence for the theoretical models of uncertainty, bookbuilding, and prospect theory.     

Transparency in IPO mechanism: Retail investors’ participation,IPO pricing and returns

Using data from the transparent Indian IPO setting, the paper examines retail investors’ participation, their influence on IPO pricing and the returns they make on IPO investment. The transparency in the mechanism, which allows investors to observe prior investors’ participation, leads to demand which is concentrated at either one or two points of the offer price range. Analysis of investors’ demand during the offer period shows that the participation of retail investors is significantly influenced by the participation of institutional investors. We examine IPO pricing and find that favourable demand by retail investors is positively associated with a high IPO price even after controlling for demand by institutional investors. Further, we find that due to aggressive bidding by overconfident investors, retail investors are, on average, unlikely to make positive allocation weighted initial returns even in a setting where they do not have to compete with institutional investors. Retail investors, however, can earn significant positive allocation weighted initial returns if they limit their participation in IPOs with above average institutional investors’ demand.     

IPO first‐day returns: Skewness preference,investor sentiment and uncertainty underlying factors

In this paper, we investigate the initial public offering (IPO) first-day returns. Our focus is to examine the irrational component of the agent behavior towards IPO lotteries. Based on 234 French IPOs performed between 2002 and 2012, we find that IPOs with high initial returns have higher idiosyncratic skewness, turnover and momentum. This finding provides empirical evidence for investors' preference for stocks with lottery-like features and investor sentiment. In addition, we show that the skewness preference and the investor sentiment effect are stronger during periods of favorable market conditions. Our results are robust to the integration of uncertainty underlying factors.     

Valuing and pricing IPOs

This paper investigates how underwriters set the IPO firm’s fair value, an ex-ante estimate of the market value, using a unique dataset of 228 reports from French underwriters. These reports are issued before the IPO shares start trading on the stock market and detail how underwriters determined fair value. We document that underwriters often employ multiples valuation, dividend discount models and discounted cash flow (DCF) analysis to determine fair value but that all of these valuation methods suffer from a positive bias with respect to equilibrium market value. We also analyze how this fair value estimate is subsequently used as a basis for IPO pricing. We report that underwriters deliberately discount the fair value estimate when setting the preliminary offer price. Part of the intentional price discount can be recovered by higher price updates. We find that, controlling for other factors such as investor demand, part of underpricing stems from this intentional price discount.     

Institutional Allocation in Initial Public Offerings: Empirical Evidence

We analyze institutional allocation in initial public offerings (IPOs) using a new data set of U.S. offerings between 1997 and 1998. We document a positive relationship between institutional allocation and day one IPO returns. This is partly explained by the practice of giving institutions more shares in IPOs with strong premarket demand, consistent with book-building theories. However, institutional allocation also contains private information about first-day IPO returns not reflected in premarket demand and other public information. Our evidence supports book-building theories of IPO underpricing, but suggests that institutional allocation in underpriced issues is in excess of that explained by book-building alone.     

Systematic risk,the tradeoff of leverage and IPO first-day returns

In this paper, we investigate IPO first-day returns in French market. Our focus is to assess the relationship between equity risk, corporate leverage and IPO initial returns. Based on data of 254 French IPOs, traded on Euronext/Alternext markets over the period 2006 and 2016, we find that estimated beta and idiosyncratic volatility are strongly and negatively related to book and market net gearing ratios. We also find that the interaction terms between equity risk measures and corporate leverage ratios are inversely related to IPO first-day returns. In addition, we highlight that industry and macroeconomic environment variables are significant predictors of equity initial returns. Robustness check of our findings indicates less relevant results for corporate leverage when it is estimated as independent variable.

     

媒体报道与IPO绩效:信息不对称还是投资者情绪?——基于创业板上市公司的研究

本文以创业板开板以来至2011年4月底的所有创业板IPO公司为研究样本,通过讨论IPO前不同时期的媒体报道情况对IPO绩效的影响,探讨了媒体在IPO过程中所扮演的角色。在控制样本自选择偏差后,发现招股公告日至上市日之间的短期媒体报道与IPO抑价和首日换手率均呈显著的正相关关系,符合投资者情绪假说;而招股公告日前一年的长期媒体报道与IPO抑价也显著正相关,但是和首日换手率之间的关系并不显著,信息不对称假说未得到支持。本文认为信息不对称假说未得到支持可能与市场以情绪投资为主、忽视价值投资的现象有关。     

Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?

One of the puzzles regarding initial public offerings (IPOs)is that issuers rarely get upset about leaving substantial amountsof money on the table, defined as the number of shares soldtimes the difference between the first-day closing market priceand the offer price. The average IPO leaves $9.1 million onthe table. This number is approximately twice as large as thefees paid to investment bankers and represents a substantialindirect cost to the issuing firm. We present a prospect theorymodel that focuses on the covariance of the money left on thetable and wealth changes. Our reasoning also provides an explanationfor a second puzzling pattern: much more money is left on thetable following recent market rises than after market falls.This results in an explanation of hot issue markets. We alsooffer a new explanation for why IPOs are underpriced.     

Uncertain Demand,Heterogeneous Expectations,and Unintentional IPO Underpricing

Distinguishing between intentional and unintentional incentives to underprice initial public offerings (IPOs), I develop sufficient conditions for the winners' curse postulated by Miller (1977) and implications for intertemporal changes in the magnitude of underpricing. Specifically, I show that unintentional underpricing (and occasional overpricing) of IPOs is a consequence of investors' heterogeneous expectations of the uncertain value of a stock when the supply is constrained and the underwriter's price discovery process only partially identifies aggregate demand. Moreover, an IPO that is oversubscribed in the premarket sale almost certainly will experience a short‐term price increase in the secondary market.     

首日涨停板制度与IPO解禁效应——基于投机泡沫视角的分析

本文以2006—2016年上市的1397家公司为研究样本,实证检验了首日涨停板制度对新股解禁效应的影响。结果发现:首日涨停板制度实施期间发行的新股,解禁时有显著更差的市场表现,[-30,30]窗口期间的超额回报低至-8.43%,同时有更小的异常交易量和异常波动率;新股上市时股价高估程度越大、投资者情绪越高,首日涨停板制度对解禁效应的影响越强。上述结果支持了Hong et al.(2006)提出的“解禁与资产泡沫破灭”的理论,即首日涨停板制度导致新股发行后投机泡沫累积,投机泡沫破灭导致解禁时更大幅度的股价下跌。本文的研究结论补充了首日涨停板制度后果的文献,并对防范金融风险和完善新股市场化改革具有一定的政策参考价值。     

Differences of opinion,institutional bids,and IPO underpricing

Miller (1977) hypothesizes that IPO underpricing arises because the issue price is based on the average opinion while the aftermarket price is set by a minority of optimistic investors. Using a unique data set of institutional bids for a large sample of Chinese IPOs, we show that the IPO issue price is positively related to the quantity-weighted average bid price and unrelated to the market-clearing bid price. In contrast, the first-day closing price is positively related to the market-clearing bid price and unrelated to the average bid price. Overall, our results provide strong support for Miller's explanation of IPO underpricing.     

Regulatory underpricing: Determinants of Chinese extreme IPO returns

The Chinese stock market with its unique institutions is rather different from western stock markets. The average underpricing of Chinese IPOs is 247%, the highest of any major world market. We model this extreme underpricing with a supply-demand analytical framework that captures critical institutional features of China's primary market, and then empirically test this model using a sample of 1377 IPOs listed on the Shanghai and Shenzhen Stock Exchanges between 1992 and 2004. We find that Chinese IPO underpricing is principally caused by government intervention with IPO pricing regulations and the control of IPO share supplies. Besides the regulatory underpricing, this paper also documents some specific investment risks of IPOs in China's stock market.     

Acquisition valuations of withdrawn IPOs: When IPO plans turn into mergers

We examine the acquisition valuations of withdrawn-IPOs – private targets that are acquired after they file and then withdraw their IPOs – to examine how IPO registration and withdrawal affect valuations of withdrawn-IPOs in their subsequent mergers. We find that these “almost public” withdrawn-IPOs sell at a significant acquisition premium relative to comparable pure private targets that never file IPO registration and at acquisition valuations similar to comparable public targets. The premium persists only for withdrawn-IPOs that are acquired before their IPO withdrawals after other factors are controlled for. These findings confirm that there is a significantly positive (negative) valuation impact of IPO registration (IPO withdrawal) on withdrawn-IPOs’ subsequent acquisitions. The two effects offset each other for withdrawn-IPOs that are acquired after their IPO withdrawals.     

Public market staging: The timing of capital infusions in newly public firms

We examine financing activities of newly public firms for evidence on capital staging in the public equity market. Staging (sequential financing) can increase issuance costs but can limit costs associated with overinvestment. We find evidence consistent with the hypothesis that staging is employed to help control the overinvestment problem in public firms. Initial public offering (IPO) proceeds, relative to external financing requirements, are smaller for firms with more intangible assets and more research and development (R&D)-intensive firms. Asset intangibility and R&D intensity are also both negatively related to the length of time from a firm's IPO to its first post-IPO capital infusion.     

THE EFFECT OF THE TRADING SYSTEM ON IPO UNDERPRICING: EVIDENCE FROM THE 1997 ORDER‐HANDLING RULES

We use a natural experiment resulting from the 1997 Securities and Exchange Commission rule mandating a change in the order‐handling rules (OHR) for all NASDAQ stocks to test whether secondary market structure affects initial public offering (IPO) underpricing. We find that the increase in liquidity that the OHR represent led to a decrease in underpricing for cold NASDAQ IPOs, suggesting that when liquidity is lowest, changes in market liquidity display a negative relation to initial returns.     

Decisions of Initial Public Offering Review Committees: Causes and Consequences

We investigate the causes and consequences of the decisions made by an initial public offering (IPO) reviewing committee using a unique data set from Taiwan. Firms that were approved for listing are associated with better financial performance measures and are larger in equity size. Whether the committee unanimously approves an IPO firm depends on whether the firm's associated auditor changes or gives a nonunqualified report. The voting outcome has a discernable effect in the sense that unanimously approved firms are associated with higher financial performance measures (returns on equity, returns on assets, earnings per share, and the price-to-earnings ratio) than are nonunanimously approved firms, with the differences being more significant in the two years after the IPO.     

Earnings management and the allocation of net periodic pension costs to interim periods

We examine the pattern of reported quarterly net periodic pension costs. Quarterly pension costs are one of the largest single expense items for firms with pension plans (around 15% of income before extraordinary items in our sample). Under ASC 270, net pension costs should be recognized as incurred, or as the benefit provided by the expense is realized. We find that over the period of 2004–2010, there is significant variation in the amount of quarterly pension cost firms report. In addition, we find that income-increasing changes in pension costs are significantly associated with meeting or beating analysts' forecasts in a given quarter. We also show that income-decreasing changes to net periodic pension costs that would cause a firm to miss its earnings forecast are extremely rare. Finally, we find evidence that income-increasing and income-decreasing changes in quarterly pension costs are “settled up” in the fourth quarter (e.g., they are reversed).     

Underwriter learning about unfamiliar firms: Evidence from the history of biotech IPOS

This study examines the ability of underwriters to properly value unfamiliar firms prior to issuance. I use a sample of IPOs in biotechnology, a relatively new but thriving industry. The first American biotech IPO was in 1980. Through the end of 2004, almost 500 biotech IPOs have appeared in the public market. I find that biotechnology differs from other industries in the attributes of individual firms valued by the market. In particular, R&D and the quality of human capital (e.g., star scientists on the staff) are much more important for biotech valuations. I find also that underwriters appeared not to appreciate this distinction for early biotech IPOs; in those cases, first-day market returns were predictable by firm attributes not used by underwriters to establish IPO issue prices. I also find that underwriters have learned over time, albeit slowly. Over the 20+ years of biotech history, IPO issue prices have become more dependent on firm attributes unique to biotechs while first-day market returns have become less predictable.     

Overreaction in the thrift IPO aftermarket

We study the initial returns and long-run performance of a unique sample of thrifts that have recently converted from mutual to stock form. In addition to a full claim on all IPO proceeds, new investors in a converted thrift also receive a claim on all pre-conversion market value at no cost. Thus, the average firm in our sample has a degree of underpricing automatically built into its offer price. We find that after removing the large initial returns, cumulative excess returns for the firms in our sample are positive for 12 months after the IPO. Beginning in the second year after the IPO, the average firm in our sample undergoes a significant price correction that lasts approximately 18 months and which produces negative cumulative abnormal returns for up to 5 years post-issue. Differences in risk-adjusted returns also indicate negative long-run returns, with poor performance concentrated in the second and third years following the IPO. The return differences are most pronounced among the small thrifts in our sample, and are broadly consistent with investor overreaction at the time of the IPO that continues for 6–12 months before prices begin reverting back to fundamental value.