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.     

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.     

THE PRICING OF EQUITY CARVE‐OUTS DURING THE 1990s

We examine the level of underpricing and characteristics of equity carveouts (ECOs) from 1990 to 1998 (the 1990s) and from 1999 to 2000 (the bubble period). For a sample of 458 ECOs, we find a mean initial return of 8.75% for the 1990s and 47.76% for the bubble period. The results suggest that, similar to other initial public offerings (IPOs), ECOs have been more willing to accept underpricing through time because of an increased importance in analyst coverage and the increased use of spinning, the practice where investment bankers allocate IPOs to high‐profile customers to garner potential future business.     

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.     

UNDERPRICING OF IPOS THAT FOLLOW PRIVATE PLACEMENT

In this study we examine the underpricing of initial public offerings (IPOs) by firms that have private placements of equity before their IPOs (PP IPO firms). We find that PP IPOs are associated with significantly less underpricing than their peers. Furthermore, PP IPOs are associated with lower underwriting spreads, more reputable underwriting syndicates, and greater postissue analyst coverage as compared to IPOs that are issued by their industry peers under similar market conditions. Consistent with the implications of the information asymmetry explanation for IPO underpricing, our findings suggest that companies could benefit by conveying their quality via successful pre‐IPO private placements that help reduce the cost of going public.     

The Role of U.S. Market on International Risk‐Return Tradeoff Relations

We study the intertemporal risk‐return tradeoff relations based on returns from 18 international markets. We find striking new empirical evidence that the inclusion of U.S. market returns significantly changes the estimated risk‐return tradeoff relations in international markets from mostly negative to predominantly positive. Our results are consistent with the lead‐lag effect between U.S. and international markets in the sense of Rapach, Strauss and Zhou.     

International Cross‐Listings and Subsequent Security‐Market Choices: Evidence from ADRs

We study the link between the attributes of American depositary receipt (ADR)‐listed firms and their post‐listing security‐market choices. We find that developed market firms are more likely to issue equity and debt than their emerging market counterparts. Furthermore, we find that large firms are more likely to issue debt and less likely to issue equity. When we examine locations where ADR firms raise their capital, we find that firms originating from countries where the protection of minority shareholders is weak are more likely to issue debt on their home markets and less likely to issue debt on international markets (excluding U.S. markets). Furthermore, ADR firms originating from developed (emerging market) countries are more (less) likely to issue their equity on their domestic markets and less (more) likely to issue equity on international markets (excluding U.S. markets).     

Underpricing of Chinese A-share IPOs and short-run underperformance under the approval system from 2001 to 2005

This paper analyses underpricing and short-run underperformance of the Chinese A-share IPOs from Mar, 2001 to 2005 when the new approval system was adopted. We find that the average market adjusted first-day return is 93.49% in this period, a more reasonable level when compared with those in previous periods in China. The findings show that underpricing in this period is significantly affected by offering mechanisms and inequality of demand and supply of IPOs. The effect of shareholder's structure is tested in the model and state-owned share's weight is shown to increase the degree of underpricing. Meanwhile, this paper analyses IPOs' short-run underpricing on their 10th, 20th, 30th trading days. It is found that most IPOs' underpricing shrinks and the degree of shrinking degrees is different across the groups categorized by offering mechanisms. Further, the underperformance of IPOs which are underwritten by more prestigious underwriters shows a comparatively lower range and is less severe in the short-run.     

A Comparison of Underwriting Costs of Initial Public Offerings by Investment and Commercial Banks

We examine differences in underwriting costs between commercial‐bank‐Section‐20‐underwritten initial public offerings (IPOs) and investment‐bank‐underwritten IPOs. Our results suggest that total underwriting costs (gross margin plus underpricing) are significantly lower for commercial bank IPOs. The lower cost for commercial bank IPOs is attributable to less severe underpricing for these issues. Gross margin costs generally do not differ between commercial bank and investment bank issues. Furthermore, we find that the long‐run stock price performance for commercial bank issues is superior to that of investment bank issues. That is, lower underpricing for Section 20 issues may not be a short‐run phenomenon. Rather, there appears to be a favorable outcome for investors in the long run for holding IPOs underwritten by Section 20 commercial banks. These results are inconsistent with the conflict of interest hypothesis often associated with merging commercial and investment bank functions in one organization.     

Initial and Long-Run IPO Returns in Central and Eastern Europe

ABSTRACT

This article provides original evidence on IPO underpricing and long-run underperformance in Central and Eastern Europe (CEE) and compares results to the European Union’s developed capital markets from 2000 to 2009. Using both index-adjusted and CAPM-adjusted returns, we find significant underpricing that is significantly higher than underpricing of comparable IPOs in the European Union’s developed capital markets. We show that the CEE’s initial IPO returns also exhibit significantly higher volatility. In line with the asymmetric information theory, we indicate that smaller IPOs in the CEE region have greater underpricing than the larger IPOs. Contrary to the literature, we unambiguously confirm long-run underperformance toward the benchmarks. In some model specifications, we also find that IPO long-run underperformance in the CEE region is less present than in the European Union’s developed capital markets.     

The Announcement Effects of U.S. versus non‐U.S. Bank Mergers: Do They Differ?

Non‐U.S. bank mergers are becoming an increasingly important part of the worldwide economic landscape. Are the market reactions to non‐U.S. bank mergers similar to the reaction in the United States? I address this question by examining abnormal returns of publicly traded partners on the announcement of forty‐one non‐U.S. bank mergers and comparing the returns with a U.S. control group. I find acquirers in non‐U.S. domestic bank mergers earn more and non‐U.S. targets earn less than their U.S. counterparts. However, for the subset of mergers in countries with relatively well‐developed stock markets, I find that partners earn similar returns.     

Information content of IPO grading

In the year 2007, Indian capital market regulator-SEBI, introduced a unique certification mechanism for IPOs whereby all IPOs have to undergo mandatory quality grading by independent rating agencies. In this paper we argue that such objective, independent and exogenous certifying mechanism provides a better opportunity to test the well established certification hypothesis, especially in the context of emerging markets with institutional voids. Using a sample of 163 Indian IPOs we test the efficacy of IPO grading mechanism. We find, grading decreases IPO underpricing and positively influences demand of retail investors. Grading reduces secondary market risk and improves liquidity. However, grading does not affect long run performance of the IPOs. IPO grading successfully capture firm size, business group affiliation and firm’s quality of corporate governance. Our findings imply that, in emerging markets, regulator’s role to signal the quality of an IPO contributes towards the market welfare.     

Dual Class IPOs ARE Underpriced Less Severely

We analyze a sample of dual and single class initial public offerings (IPOs) to investigate whether empirical estimates of underpricing determinants are consistent across alternative measures of firm size and alternative techniques intended to account for underwriter price stabilization efforts. We find that results from long‐standing methods for estimating underpricing relations are generally robust to one's choice of size proxy and are consistent with estimates obtained from censored regressions of first‐day returns and from least squares regressions of longer horizon initial returns. We also confirm an existing finding in the literature that dual class IPOs endure less underpricing than do single class firms.     

Model specification and IPO performance: New insights from Asia

This study examines the post-issue stock price performance of initial public offerings (IPOs) from advanced and emerging Asian markets from 1991 to 2004. We provide a comparative assessment on the short- and long-term stock performance of Asian IPOs with comprehensive international evidence. We use several different methods to examine the robustness of IPO performance. Our results reveal that whilst there is initial underpricing in Asian IPOs, the existence of long-run underperformance for the Asian IPOs depends resoundingly on the methodology used for assessment.     

Hot Money and Quantitative Easing: The Spillover Effects of U.S. Monetary Policy on the Chinese Economy

We develop a factor‐augmented vector autoregression (FA‐VAR) model to estimate the effects that unanticipated changes in U.S. monetary policy and economic policy uncertainty have on the Chinese housing, equity, and loan markets. We find the decline in the U.S. policy rate since the Great Recession has led to a significant increase in Chinese housing investment. One possible reason for this effect is the substantial increase in the inflow of “hot money” into China. The responses of Chinese variables to U.S. shocks at the zero lower bound are different from those responses in normal times.     

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 Valuation,Partial Adjustment,and Underpricing: Behavioral Bias or Information Production?

Using a sample of venture capital (VC)‐backed initial public offerings (IPOs), we analyze the role played by perceived valuation changes on IPO underpricing. We find that perceived valuation change from the last pre‐IPO VC round to the IPO affects IPO underpricing in a nonlinear way. Further analysis indicates that information‐based theories, not behavioral biases, explain this nonlinearity. We also find that the previously documented partial adjustment effect and its nonlinear impact on IPO underpricing are related to the trajectory of the perceived valuation changes, which stands in stark contrast to prior evidence of the importance of behavioral biases.     

DIVERGENCE OF OPINION AND LONG‐TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Miller's hypothesis posits that divergence of opinion can lead to asset overvaluation and subsequent long‐term underperformance in markets (such as initial public offerings [IPOs]) with restricted short‐selling. Consistent with this hypothesis, we find that early‐market return volatility, a proxy for divergence of opinion, is negatively related to subsequent IPO long‐term abnormal returns. This relation holds after accounting for other factors that previous studies suggest affect long‐term abnormal returns for IPOs (including another proxy for divergence of opinion). Moreover, we find that this relation is stronger in IPO markets than in non‐IPO markets (where short‐selling restrictions are less stringent), again consistent with Miller's hypothesis.