IPO Placement Risk and the Number of Co‐Managers

Previous studies show that co‐managers mainly affect initial public offering (IPO) aftermarket activities. We investigate the role of co‐managers in IPO pre‐market activities. We argue that co‐managers help reduce IPO placement risk and hypothesize that IPO issuers hire more co‐managers when placement risk is higher. We find the number of co‐managers is positively associated with three proxies for placement risk. IPOs with more price uncertainty and high‐tech IPOs hire more co‐managers, while IPOs in regulated industries hire fewer co‐managers. We also find larger IPOs, recent IPOs, and IPOs with more reputable lead underwriters hire more co‐managers.     

Syndicate structure and IPO outcomes: The impact of underwriter roles and syndicate concentration

We examine how the composition and concentration of the underwriting syndicate affects outcomes in U.S. initial public offerings (IPOs) from 2002 to 2020. Most IPOs now feature “phantom” lead managers who underwrite significantly fewer shares than the lead-left bookrunner. We hypothesize that the phantom lead is the result of bargaining between issuers wanting greater information production and lead-left bookrunners preferring greater control of the IPO. Larger, less concentrated IPO syndicates feature more absolute price adjustments from the filing price during bookbuilding with downward revisions on average, and more analyst following post-IPO. The magnitude of price adjustments is greater when adding active joint leads relative to passive phantom leads. More concentrated IPOs feature higher first-day returns following positive price adjustments. Adding lead managers reduces the likelihood the lead-left will retain that role in follow-on equity offerings.     

Fixed price and book building methods in an exogenous environment: Evidence from Indonesia stock market

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.     

Does the Market Incorporate Previous IPO Withdrawals When Pricing Second‐Time IPOs?

This paper examines the initial public offering (IPO) valuations of issuers that return to the IPO market successfully after withdrawing their first IPO attempt. We find that these second-time IPOs sell at a significant discount relative to similar contemporaneous IPOs that succeed in their first attempt. We also demonstrate that switching underwriters on the second IPO attempt reduces, but does not eliminate, the discount for second-time IPOs. When compared to their matched first-time IPOs, second-time IPOs have similar price revisions and post-IPO long-run stock and operating performances. Overall, these results suggest that the negative information conveyed by the withdrawal event is incorporated into the lower offer valuations for second-time IPOs. Switching investment banks can mitigate, but not eliminate, the perceived higher risk of the second-time offerings.     

SEC confidential treatment and regulatory filing reviews

We study the interplay between the redaction of information from regulatory filings and SEC monitoring of the redacting firms. We find that redactions are associated with more intense SEC monitoring, as evidenced by higher incidence of comment letters and a longer letter resolution process. Hand collected data indicate seller firms that redact information from their sales, licensing, and royalty contracts are more likely to receive revenue recognition-related comment letters, suggesting spurious correlation is not a likely explanation of the inference. We supplement our findings by providing evidence that redacting firms tend to manage proprietary information disclosure, withholding proprietary information that should be made public under extant rules and regulations. Our findings shed light on how various SEC monitoring processes interact and support one another, offering a novel look on the interaction between a firm’s management of proprietary information disclosure and regulatory oversight.     

Issuer IPO underpricing and Directed Share Program (DSP)

The issuer underpricing hypothesis addresses why IPOs with a Directed Share Program (DSP) are substantially more underpriced and why the issuers are not upset over the additional money left on the table. In support of the hypothesis, we find that both the final size and likelihood of DSP adoption are greater when expected IPO underpricing is high. Issuers with a DSP also strategically underprice their IPO through a downward bias in offer price adjustments, but will do so only when the cost is not prohibitive. Finally, the first-day IPO return is relatively higher when directed shares are allocated to customers.     

Issuer Operating Performance and IPO Price Formation

We study the relation between issuer operating performance and initial public offering (IPO) price formation from the initial price range to the offer price to the closing price on the first trading day. For a post‐bubble sample of 2001–2013 IPOs, we find that pre‐IPO net income and, in particular, operating cash flow are strongly, positively associated with the revision from the mid‐point of the initial price range to the offer price and that the “partial adjustment phenomenon” concentrates among issuers with the strongest operating performance. As for why publicly observable information helps predict changes in valuation from when the initial price range is set to when the offer price is set, our findings suggest that strong‐performing issuers, especially those offering small slices of ownership, have lower bargaining incentives and are susceptible to the underwriter(s) low‐balling the price range. Overall, our results suggest an important role for accounting information in understanding the pricing of book‐built IPOs and are consistent with the presence of agency problems between issuers and underwriters.        

Bookbuilding,the option to withdraw,and the timing of IPOs

The ability to withdraw IPOs when demand is weak increases expected proceeds and provides issuers with option value. To enhance this value, the SEC adopted in 2001 the ‘public-to-private’ safe harbor Rule 155 and simplified Rule 477 for withdrawing offerings. The option value can exceed the underpricing associated with soliciting investor demand. Hence, issuers might prefer bookbuilding despite the associated underpricing even if they could sell via fixed price at full expected value. The option value increases faster than underpricing with ex ante uncertainty, generating predictions regarding the use of bookbuilding and the timing of IPOs, and leading to a distinct theory of hot IPO markets.     

SEC monitoring of foreign firms’ disclosures in the presence of foreign regulators

SEC comment letters indicate that the SEC has reviewed the firm’s filings and identified a disclosure issue. Using the existence of an SEC comment letter as a proxy for SEC monitoring, we document a negative association between the level of SEC monitoring of foreign firms and the strength of those foreign firms’ home-country institutions, consistent with the idea that the SEC implicitly shares its regulatory duties with international securities regulators. We find that foreign cross-listed firms are subject to lower monitoring intensity than foreign firms listed only on US exchanges, but do not find a statistically significant difference in monitoring between foreign firms listed only on US exchanges and US firms. These findings suggest that it is the presence of another regulator that drives the intensity of SEC monitoring. We also find that US investor holdings are positively associated with the level of SEC oversight, suggesting that the SEC focuses its resources on firms that pose a greater risk to US investors. Collectively, our analyses show that two countervailing forces drive the SEC’s choice to monitor foreign firms. On the one hand, the SEC reduces monitoring intensity when it can rely on the public and private enforcement institutions in the foreign firm’s home country. On the other hand, the SEC provides increased monitoring of certain foreign firms when investors on US exchanges have greater investment exposure in those firms.     

The decision to list abroad: The case of ADRs and foreign IPOs by Chinese companies

This paper examines the decision to list abroad by Chinese companies in the form of ADRs and foreign IPOs from 1993 to 2005. Our sample consists of 33 ADRs, 218 foreign IPOs, and a sample of 1418 domestic listings. We find evidence to support that issuers are motivated to cross-list due to the legal and accounting standards of the foreign markets, more stringent listing requirements and closer regulatory monitoring, significant demands for external capital due to rapid growth, an expanded shareholder base, and foreign expertise. The motives and firm factors differ by the type of issue (ADR versus foreign IPO) and by the market in which the foreign exchange is located (Hong Kong versus Singapore). Subsequent to the listing events, issuers experience a significant drop in profitability, tangible assets ratio, and asset turnover. There is no significant change in capital expenditure. Stock returns after the listing events are generally negative for ADR and foreign IPO stocks. More significantly, these stocks under-perform the market in the post-event window ranging from 3 days to 3 years.     

Industrial Diversification and Underpricing of Initial Public Offerings

The initial public offerings (IPOs) of diversified firms, those reporting more than one business segment at the time they go public, experience less underpricing than do IPOs by focused issuers. We explore two explanations for this phenomenon. Diversification may benefit IPO firms by reducing information asymmetries and therefore, lowering underpricing costs. Alternatively, high quality focused firms may be signaling their value by underpricing their shares to a greater degree. Though we find at least some evidence consistent with each explanation, a majority of the evidence favors signaling.     

Do regulatory changes affect the underpricing of European IPOs?

We use a sample of 3677 European IPOs during the period 1998–2012 to examine how the adoptions of corporate governance codes by Member States of the European Union (EU) have affected IPO underpricing on Member State-regulated markets, where issuers are subject to corporate governance rules instituted by Member States, relative to a control sample of IPOs on exchange-regulated markets, where issuers are exempt from Member State corporate governance codes. Using this control sample approach facilitated by the existence of second-tier, exchange-regulated markets in the EU, we find that, on average, IPO underpricing declined on Member State-regulated markets after Member States adopted corporate governance codes containing SOX-like provisions. We do not find a similar reduction in IPO underpricing on exchange-regulated markets. Our results are robust to alternative specifications, and our findings support the view that elevating corporate governance standards increases transparency and reduces information asymmetries that affect IPO valuations.     

Venture capital‐backed and commitments test entity initial public offerings on the ASX

This paper examines initial returns to venture capital (VC) backed and non‐VC‐backed IPO companies on the Australian Securities Exchange (ASX). We find support for the theoretical predictions of Rossetto (2008), by providing empirical evidence that VC‐backed CTE IPOs exhibit greater wealth losses to pre‐IPO investors compared to non‐VC‐backed CTE IPOs during hot issue markets. We also find that greater retained ownership increases IPO underpricing. In the subsample of IPOs with below the median level of retained ownership IPOs, VC‐backed CTE IPOs and VC‐backed, non‐CTE IPOs have significantly higher levels of underpricing and wealth loss compared to non‐VC‐backed, non‐CTE IPOs.     

Issuers’ incentives and tests of Baron’s model of IPO underpricing

This paper reexamines the validity of Baron’s (J Financ 37:955–976, 1982) model of IPO underpricing, in which IPO underpricing is caused by asymmetric information between issuers and investment bankers. Muscarella and Vetsuypens (J Financ Econ 24:125–135, 1989) find that lead-manager IPOs are significantly more underpriced than non-self-marketed IPOs and conclude that their empirical results do not support Baron’s model. We compare self-marketed underwriters’ IPOs with non-self-marketed underwriters’ IPOs and with IPOs they lead. Our empirical results show that it is premature to reject Baron’s model of IPO underpricing when we take issuer incentives into account.     

Banking relationships and access to equity capital markets: Evidence from Japan’s main bank system

We study the role of banking relationships in IPO underwriting. When a firm in Japan goes public, it can engage an investment bank that is related through a common main bank, or can select an alternative investment bank. The main bank relationship can be an efficient way for the investment bank to acquire information generated by the main bank, but may give rise to conflicts of interest. We find that main bank relationships give small issuers increased access to equity capital markets, but that issuers of large IPOs often switch to non-related investment banks that are capable of managing large offerings. While investment banks seek to exploit bargaining power with related issuers, issuers respond to expected high issue cost by switching to non-related investment banks. The net result is that total issue costs through related and non-related investment banks are similar. With respect to aftermarket performance and use of proceeds, we find no evidence of conflict of interest or self-dealing for either the main bank or the investment bank.     

Two‐Sided Matching: How Corporate Issuers and Their Underwriters Choose Each Other

In this article, the authors update and confirm the findings of a 2005 article that was the first to view corporate underwriter choices as the outcome of a two‐sided matching process in which issuers look to the abilities of the underwriters offering their services and underwriters focus on the quality of the issuers that wish to use their services. This view offers a contrast with both the conventional representation of issuer‐underwriter associations as one‐sided decisions (by either issuers or underwriters) and the classical economist's representation of a competitive market in which prices serve as the primary market‐clearing mechanism. In their examination of both initial public offerings (IPOs) and seasoned equity offerings (SEOs) during the period 1980–2010, the authors continue to find strong evidence that higher‐quality issuers associate with more reputable underwriters and lower‐quality issuers match with lower reputation underwriters. Moreover, when examining cases of underwriter switching between an IPO and SEOs by the same issuer, they find that cases involving the largest divergence in the relative rankings of issuer and underwriter were the most likely to produce a change of underwriter—and that issuers that experienced larger post‐ IPO increases in quality were more likely to find more reputable underwriters for their SEOs (than for their IPOs). The authors also find that the larger the number of offerings brought to market in a given year, the smaller the market share of the top‐tier underwriters, likely reflecting the willingness of the most reputable underwriters to turn down business to maintain quality and reputation. Finally, the most reputable underwriters appear to benefit from the fact that the issuers whose IPOs they underwrite end up raising larger amounts of capital, both at the time of the IPO and in the larger and more frequent seasoned offerings by such issuers that come after the IPO. This evidence in support of two‐sided matching suggests that, especially for high‐quality issuers, the reputation of the underwriters they contract with for security offerings is likely to be more important than the underwriting fees they incur. What's more, the authors' finding that the most reputable underwriters are less likely to lose high‐quality clients and have more stable market share—and that the higher‐quality issuers they attract end up raising larger amounts of capital over their lives as public companies—suggests that underwriters' investments in building and preserving their reputations have a large expected payoff.     

Another Look at Bookbuilding,Auctions, and the Future of the IPO Process

In an earlier series of articles published in this journal, one of the three authors of this article predicted the rise of auction IPOs, possibly to the point of displacing the traditional bookbuilding process for pricing and allocating IPOs, only to find himself forced to explain in later articles the continuing preference of issuers for the conventional IPO process. In a 1999 article, for example, this author cited WR Hambrecht as posing a serious challenge to bookbuilding. And in a 2005 article, shortly after Google used an auction for its IPO, he suggested that the time was ripe for change. In this article the authors revisit the debate, taken up most recently in a 2012 exchange between Congressman Darrell Issa and the SEC. They begin by discussing why bookbuilding persists before focusing on several recent developments that could undermine the case for bookbuilding. The authors point out that bookbuilding rests on banks' discretion in allocating IPO shares and, critically, on both issuers and investors trusting that it will be deployed appropriately. After discussing developments that have undermined trust in the financial markets, the authors suggest that, when combined with recent regulatory changes intended to streamline public offerings by small firms, such changes have created opportunities for auctions to gain traction in the U.S. IPO market.     

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.     

Earnings Management and the Long-Run Market Performance of Initial Public Offerings

Issuers of initial public offerings (IPOs) can report earnings in excess of cash flows by taking positive accruals. This paper provides evidence that issuers with unusually high accruals in the IPO year experience poor stock return performance in the three years thereafter. IPO issuers in the most "aggressive" quartile of earnings managers have a three-year aftermarket stock return of approximately 20 percent less than IPO issuers in the most "conservative" quartile. They also issue about 20 percent fewer seasoned equity offerings. These differences are statistically and economically significant in a variety of specifications.     

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.