Audit quality, auditor compensation and initial public offering underpricing

We jointly study the impact of audit quality on auditor compensation and initial public offering (IPO) underpricing using a sample of Australian firms going public over the period 1996–2003. We find that quality (Big Four) audit firms earn significantly higher fees than non-Big Four auditors, and audit quality is positively associated with IPO underpricing. The positive relation between audit quality and underpricing is more pronounced for small issues, IPOs underwritten by non-prestigious underwriters, and those that are not backed by venture capitalists. Taken together, our results suggest that quality auditors serve as a signalling device that enhances post-issue market value of equity.     

Underwriter Spread, Underwriter Reputation, and IPO Underpricing: A Simultaneous Equation Analysis

This paper studies the relationships between underwriter reputation, underwriter spread, and IPO underpricing. We consider the information content of underwriter spread and find that it conveys information pertinent to IPO quality. Because underwriter spread is endogenous, underpricing and underwriter spread are jointly determined in a simultaneous equation system. Also, we examine the IPO market for evidence of segmentation, and our results suggest some market segmentation. Underwriter spread impacts initial underpricing for a group of medium-reputation underwriters, while underpricing affects underwriter spread for groups of low- and high-reputation underwriters. Consequently, high-risk IPOs may not be priced the same way as low-risk IPOs. We attribute this finding to regulation, competition, and/or market segmentation.     

Management quality,certification, and initial public offerings

We empirically examine the relationship between the quality and reputation of a firm's management and various aspects of its IPO and post-IPO performance, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thereby reducing the information asymmetry facing their firm in the equity market. Therefore, IPOs of firms with higher management quality will be characterized by lower underpricing, greater institutional interest, more reputable underwriters, and smaller underwriting expenses. Further, if higher management quality is associated with lower heterogeneity in investor valuations, firms with better managers will have greater long-term stock returns. Finally, since better managers are likely to select better projects (having a larger NPV for any given scale) and implement them more ably, higher management quality will also be associated with larger IPO offer sizes and stronger post-IPO operating performance. We present evidence consistent with the above hypotheses.     

Underwriter Reputation, Initial Returns, and the Long-Run Performance of IPO Stocks

We find that the underperformance of IPO stocks relative to the market over a three-year holding period is less severe for IPOs handled by more prestigious underwriters. Consistent with prior studies, we also find that IPOs managed by more reputable underwriters are associated with less short-run underpricing. Among the various existing proxies for underwriter reputation, the Carter–Manaster measure is the most significant in the context of initial returns and also in the context of the three-year performance of IPOs. The study also provides an updated list of the Carter–Manaster measure for various underwriters.     

Underwriter reputation and underpricing: evidence from the Australian IPO market

Dimovski and Brooks (J Intern Financ Mark Inst Money 14:267–280, 2004b) examined 358 Australian industrial and mining company initial public offerings (IPOs) from 1994 to 1999 to report that more money was left on the table by IPOs that engaged underwriters than those that did not engage underwriters. Loughran and Ritter (Autumn 5–37, 2004) suggested that the negative relation between underwriter reputation and underpricing has reversed in the 1990s with U.S. IPOs. The main purpose of this paper is to study the relationship between underwriter reputation and underpricing in terms of Australian IPO data. In this paper, we use 380 Australian industrial company IPOs from 1994 to 2004 to perform the empirical study. Our results suggest that more prestigious underwriters are associated with a higher level of underpricing. Other variables that are found to be significant in explaining the level of IPO underpricing are market sentiment, share options, total capital raised and underwriter options.     

The politics of government financial management: Evidence from state bonds

In the $3.7 trillion U.S. state-and-local-government-bond market, greater issuance costs (lower issue-prices and greater underwriting fees) benefit financial institutions, while costing taxpayers. Campaign contributions by politically supportive underwriters can be associated with lower issuance costs. Alternatively, contributions can influence a politician to accept greater costs. This paper's evidence suggests that contributions influence politicians: In the absence of an underwriter auction, underpricing increases with the chosen underwriter's contributions relative to others. Moreover, the difference in the fees charged by contributing underwriters and those charged by non-contributing underwriters is 2.9%. In the presence of an underwriter auction, these results are statistically insignificant.     

双重上市、IPO抑价与大规模融资行为——来自中国公司IPO的证据

本文以中国1993～2009年期间的1158家IPO(其中A+H公司36家)为样本,实证检验了A+H双重上市与公司IPO行为之间的关系。研究发现:A+H双重上市与单位权益发行价、IPO定价效率、融资规模效率均显著负相关,表明A+H双重上市非但没有给公司带来IPO溢价,反而导致更高的IPO抑价。进一步分析表明,A+H公司的更高IPO抑价与其大规模的股票发行数量显著正相关,正是A+H公司的大规模股票发行迫使发行人和承销商采取低价策略以保证成功IP0,并导致A+H公司具有偏好在热市期上市的择时行为。     

IPOs with and without allocation discretion: Empirical evidence

Bookbuilding, the dominant offering mechanism for IPOs, is controversial because of the power it gives underwriters over IPO allocations. Critics argue that allocations could be abused to generate kickbacks for underwriters while proponents hold that allocation power could improve pre-market price discovery. We examine underpricing, bidding, and allocations from two regimes in the Indian IPO market with varying underwriter allocation power. When underwriters control allocations, bookbuilding is associated with lesser underpricing, but the effect quickly dissipates when regulations withdraw allocation powers. Using proprietary datasets of IPO books in both regimes, we find that allocation powers are used quite extensively. Identical bids can receive significantly different allocations, which depend not only on the bid but also on the bidder identity. When allocation powers are withdrawn, we find evidence of bidder exit, new bidder entry, and altered bidding strategies with exit by both favored and unfavored bidders. Our evidence supports bookbuilding theories in which giving underwriters allocation powers assists in pre-market price discovery.     

UK IPO underpricing and venture capitalists

We analyze the nature and causes of short-run underpricing for a unique sample of 591 Initial Public Offers (IPOs) issued on the London Stock Exchange for the period 1985–2003. We find significant differences between the 1998–2000 bubble years and the rest of the sample. Venture capitalists and reputable underwriters played a certification role in the latter period but not during the bubble years. These years featured significant increases in underpricing, money left on the table, and a decline in operating quality. The combination of venture capitalists and prestigious underwriters was increasingly associated with the highest underpricing witnessed during 1998–2000, which provides indirect support for the spinning hypothesis.     

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.     

A Reexamination of the Costs of Firm Commitment and Best Efforts IPOs

Ritter [14] documents that best efforts IPOs are, on average, more costly to issue than firm commitment IPOs. This paper explains the phenomenon. Two component costs of going public are analyzed: underpricing and underwriter compensation. The model, based on a disagreement about firm value between underwriters and issuers, shows that underpricing is higher for firms using best efforts contracts as these firms, on average, are more speculative. Underwriter compensation is hypothesized to be higher for firms using best efforts contracts because of the high costs of market making for these firms in the aftermarket and the high distribution costs associated with the high risk of a failed offer. Empirical tests strongly support the propositions.     

Underwriter reputation and IPO underpricing: The role of institutional investors in the Chinese growth enterprise market

This paper investigates the effects of underwriter reputation on initial public offering (IPO) underpricing in the Chinese Growth Enterprise Market, in light of the conflicting evidence in the literature on IPO underpricing. Using data during the post global financial crisis period, we find that IPO firms with prestigious underwriters have lower market-adjusted initial returns on average. We further find that prestigious underwriters reduce IPO underpricing by minimizing the time gap between the offering and listing, choosing high-quality firms to underwrite, and reducing information asymmetry between issuers and investors. In the presence of institutional investors, however, we find that more underpricing occurs, as these investors tend to obtain access to IPO shares at a higher price discount via private placements. This new finding suggests that the institutional investors have a role to play in the case of high under-pricing, which partly gets corrected via underwriter reputation.     

Pre-IPO券商股权投资:鉴证功能还是独立受损?

Pre-IPO券商股权投资的经济后果是财务研究领域热点话题,具体到中国,Pre-IP券商股权投资是否损害承销商的独立性引起社会公众极大的关注,本文选取2009~2011年中国IPO的样本进行了初步研究。研究发现,整体上,有券商股权投资的公司其上市前盈余管理程度显著高于其他公司,券商早期入股的公司其盈余管理程度更为明显,有券商股权投资的公司其上市之后会计业绩下滑幅度更大。进一步研究发现,有券商股权投资的公司其承销费显著更高,发行折价的幅度明显更大。这意味着作为金融创新的券商股权投资一定程度上损害了承销商的独立性,进而导致IPO市场融资效率的损害。     

Litigation risk,underpricing, and money-losing IPOs

We examine the impact of firms' pre-IPO earnings on the relationship between litigation risk and IPO underpricing. We confirm the insurance effect of the lawsuit avoidance hypothesis; however, we find that the use of underpricing to reduce litigation risk is mainly associated with firms with negative earnings at the time of going public. Our results are robust to the timelines over which sample firms were sued, alternative underpricing measures, the addition of various control variables to our baseline regression models, and different proxies to categorize IPO firms. We also investigate the relationship between litigation risk, pre-IPO earnings, and underwriter gross spreads. The results indicate that, when dealing with firms facing a high risk of litigation, underwriters charge significantly higher spreads to negative-earnings issuers than profitable IPO firms.     

The Underwriter Persistence Phenomenon

This study presents new evidence that initial IPO returns have persistent underwriter‐specific components. These components cannot be explained by existing measures of underwriter quality, underwriter service, or controls for several known predictors of initial IPO returns. Tests that trace the roots of persistence most broadly support theories of asymmetric information among underwriters. I present such a model, and consistent with its predictions, I find that high underpricing underwriters (1) are responsible for a majority of the partial adjustment phenomenon, (2) make more informed analyst revisions, (3) experience superior market share growth, and (4) are more likely to serve an institutional clientele.     

Climate change disclosure and the information environment in the initial public offering market

We investigate whether climate change disclosures in initial public offering (IPO) prospectuses affect the information environment in the IPO market. We find that climate change disclosures are associated with lower IPO underpricing. Further analyses reveal that reputable underwriters and the Securities Exchange Commission's Commission Guidance Regarding Disclosure Related to Climate Change enhance the information role of climate change disclosures in the IPO market. We demonstrate that firms with more extensive climate change disclosures provide stronger hedging benefits against climate change risks in the post-IPO period. Overall, our results support the crucial role of climate change disclosures in improving the information environment of the IPO market.     

Underpricing and long-run performance of Chinese IPOs: the role of underwriter reputation

This study examines the impact of underwriter reputation on IPO underpricing and long-run performance in the China stock market over the period 2001 to 2006. This sample period is notable for the implementation of a verification and approval system that occurred during it, which provided underwriters more freedom to price IPOs. We develop two alternative proxies to measure underwriter reputation based on either the ratio of the total gross proceeds raised or the number of IPOs managed by each underwriter. We find that underwriter reputation does not affect the level of underpricing, but that the level of long-run underperformance is significantly mitigated when IPOs are managed by more prestigious underwriters.     

The effects of venture capitalist affiliation to underwriters on short- and long-term performance in French IPOs

This paper explores the signalling and monitoring effects of venture capital (VC) backing and venture capitalist affiliation to lead underwriters on performance of IPOs in France. IPOs in which VCs are affiliated to lead underwriters (i.e., affiliated VCs) have lower underpricing than both non-affiliated VC-backed IPOs and non-VC-backed IPOs. Similarly, affiliated VC-backed IPOs exhibit greater earnings surprise and better market performance at the end of the one-year period following the IPO date. Controlling for Fama and French [Fama, E.F., & French, K. 1993. Common Risk Factors in the Returns on Stock and Bonds. Journal of Financial Economics 33, 3–56] risk factors, our results suggest that IPOs with affiliated VCs in general, and particularly those affiliated with more prestigious underwriters, have a higher long-term abnormal return than both non-affiliated and non-VC-backed IPOs. Our analysis of IPO performance indicates that more prestigious underwriters enhance effective screening, certification and monitoring roles of affiliated VCs.     

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.     

Debt Issue Costs and Issue Characteristics in the Market for U.S. Dollar Denominated International Bonds

This paper analyzes the issue costs and initial pricing of bonds in the international market. In particular, we investigate the determinants of three components of issue costs: underwriter fee, underwriter spread (the difference between the offering price and the guaranteed price to the issuer), and underpricing (the difference between the market price and the offering price). Total underwriter compensation increases with the bonds' credit risk and maturity, but it is insignificantly related to issue size. Interestingly, underwriters appear to price some issue characteristics directly (by adjusting the fee) and other characteristics indirectly (by setting the guaranteed price). The two compensation components (fee and spread) are negatively related to each other. We provide evidence that this trade-off is consistent with income tax considerations, as well as with two-tier pricing by underwriters. We find no evidence of underpricing.