The Pricing of Initial Public Offers of Corporate Straight Debt

This study examines the initial-day and aftermarket price performance of corporate straight debt IPOs. We find that IPOs of speculative grade debt are underpriced like equity IPOs, while those rated investment grade are overpriced. IPOs of investment grade debt are typically issued by firms listed on the major exchanges and underwritten by prestigious underwriters. In contrast, junk bond IPOs are more likely to be handled by less prestigious underwriters and are typically issued by OTC firms. Our analysis also reveals that bond rating, market listing of the firm, and investment banker quality are significant determinants of bond IPO returns.     

UNDERWRITER REPUTATION AND REPETITIVE PUBLIC OFFERINGS

A recent examination of underwriter reputation and initial public offerings (IPOs) suggests that one of the reasons prestigious underwriters market low-risk IPOs is to increase the expected present value of subsequent offerings. There is a greater likelihood that a firm issuing low-risk IPOs will be a viable future operation with the potential for subsequent offerings than a firm issuing high-risk IPOs. I examine the hypothesis that the likelihood of subsequent offerings is negatively related to IPO risk. In addition to finding support for this hypothesis, I show that the likelihood of subsequent offerings is positively related to the IPO underwriter's reputation and negatively related to the IPO gross spread. Finally, I find that the likelihood of firms switching IPO underwriters for subsequent offerings decreases with increasing IPO underwriter reputation.     

THE MARKET'S PRICING OF DEBT IPOs

Based on the authors' recent study published in the Journal of Financial Economics , this article summarizes new evidence on the first-day and aftermarket price performance of a firm's first public offer of bonds after its equity IPO. Unlike equity IPOs, such bond IPOs are not underpriced on average. However, bonds that are more equity-like (junk bonds) are underpriced at the initial offer whereas high-grade debt is actually overpriced. This finding supports the view that riskier debt issues have a larger equity component and, as a consequence, a higher degree of information asymmetry.
The authors' study also showed that less prestigious underwriters are associated with more underpriced offers, and that the issuer's stock market listing plays an important role in determining the first-day price performance of bond IPOs. The degree of underpricing is lower for bonds issued by firms whose equity is listed on NYSE/AMEX than for bonds issued by firms listed on Nasdaq. Finally, the aftermarket performance for the full sample and various subsamples is consistent with bond market efficiency in the sense that, once prices adjust after the first day of trading, there are no clearly exploitable opportunities for excess returns.     

合资承销商影响新股破发率的实证研究

新股破发是目前中国股市目前面临的一个重要现象。本文基于2004年至2010年上市的A股IPO,研究合资承销商对新股破发率的影响。研究发现,合资承销商所承销的新股破发率显著低于本土承销商。合资承销商的低破发率主要归功于更加有效且符合市场预期的一级市场发行定价能力,其表现为合资承销商发行的股票的短期市场价格相对发行价的偏离程度显著低于本土承销商发行的股票。另外,我们还发现合资承销商采取了一定的托市行为,该行为也减小了短期内新股跌破发行价的概率。本文的发现从新股发行的角度提供了开放金融市场对我国资本市场影响的新现象。     

Universal Banking, Asset Management, and Stock Underwriting

This paper examines institutions that underwrite IPOs and have asset management divisions from 1993 through 1998. We provide evidence that these firms use asset management funds as vehicles to help them earn more equity underwriting business. We also show that asset managers affiliated with IPO underwriters use their superior information about their own institution's IPOs to earn annualised market adjusted returns 7.6% above asset managers of firms who did not underwrite the IPO. Superior future returns by asset managers who trade affiliated IPOs are dependent on the information environment for the IPO and the underwriter reputation rank.     

Earnings management in IPOs: Post-engagement third-party mitigation or issuer signaling?

Initial public offering (IPO) firms typically hire auditors, underwriters, and attorneys to assist in the IPO process. Many firms that take the IPO route are also backed by venture capitalists. In the extant literature, these four specialists (auditors, underwriters, attorneys, and venture capitalists) are termed third-party certifiers. In this study, we examine 3900 IPOs from 1985 to 2005 and document a significant negative and robust correlation between IPO firm earnings management and the presence of prestigious third-party certifiers. Next, we test if this correlation is driven by (1) IPO firms attempting to signal firm quality or (2) third-party certifiers mitigating earnings management in the issuing firm. Using a two-stage multivariate model, we find empirical support for the signaling hypothesis — IPO firms self-select prestigious certifiers for IPOs. We do not find support for post-engagement mitigation hypothesis — after engagement, third-party certifiers do not significantly impact earnings management in IPOs.     

Partial adjustment to public information in the pricing of IPOs

Extant literature shows that IPO first-day returns are correlated with market returns preceding the issue. We propose a rational explanation for this puzzling predictability by adding a public signal to Benveniste and Spindt (1989)’s information-based framework. A novel result of our model is that the compensation required by investors to truthfully reveal their information decreases with the public signal. This “incentive effect” receives strong empirical support in a sample of 6300 IPOs in 1983–2012. Controlling for the incentive effect, the positive relation between initial returns and pre-issue market returns disappears for top-tier underwriters, where the order book is held to be most informative, effectively resolving the predictability puzzle.     

Underpricing of homecoming A-share IPOs by Chinese firms already listed abroad

Many Chinese firms have pursued overseas listings in Hong Kong or US without being first listed in China’s domestic market, mainly due to the regulatory constraints imposed by the Chinese government. Some of them eventually returned to mainland China through an A-share offering to Chinese investors. This unique feature of cross-listed Chinese stocks offers an experiment field to test some of the conventional theories of initial public offerings (IPOs) underpricing. Homebound IPOs are expected to be less underpriced than domestic only IPOs that are not cross-listed because being already listed in a developed market can mitigate the information asymmetry and issue uncertainty associated with their A-share IPOs. Nevertheless, we find that homecoming A-share IPOs are still substantially underpriced, with an average market adjusted first-day return of 96.53 %. Furthermore, their first-day returns are not significantly different from those of domestic only IPOs once firm- and offer-characteristics are controlled. This is in sharp contrast to the lukewarm aftermarket performance experienced in their overseas debuts. The mean market adjusted first-day return is merely 5.35 % in their US ADR offerings and 11.63 % in their Hong Kong H-share IPOs. Overall, our results suggest the importance of local market structures and norms as influential factors of IPO underpricing.     

Multiple lead underwriting syndicate and IPO pricing

This paper examines the role of multiple lead underwriters (MLUs) in pricing initial public offerings (IPOs) by considering certification and market power hypotheses. Consistent with the notion that MLUs provide certification to the issue, we find that IPOs backed by MLUs price the offer closer to the intrinsic value of the firm than firms backed by single lead underwriters. Our results also indicate that IPOs led by MLUs experience lower initial return, lower variability of initial returns and better long-run performance. The results are robust to self-selection and omitted variable biases. MLU led offerings also exhibit a lower risk of withdrawal and are more likely to conduct a larger secondary equity offering.     

The Performance of Internet Firms Following Their Initial Public Offering

We find that initial returns were more favorable for Internet initial public offerings (IPOs) than non–Internet firm IPOs. Since the demise of the Internet sector, the underpricing of Internet–firm IPOs is not significantly different from other IPOs.
Initial returns of Internet firms are positively and significantly related to underwriter prestige and to pre–IPO market conditions. However, initial returns after the demise of the Internet sector are not significantly related to these characteristics.
The aftermarket performance of Internet firms is initially favorable but weakens over time. Firms that experienced higher initial returns during the strong Internet cycle experience weaker aftermarket performance.     

Underwriter reputation,earnings management and the long‐run performance of initial public offerings

This study contributes to the extant literature on the nature of earnings management surrounding initial public offerings (IPOs) by investigating the role of underwriter reputation. We argue that prestigious underwriters will protect their reputation by carefully monitoring and certifying financial information on IPO firms, thereby limiting any potential earnings manipulation. As a result, those IPO firms that are associated with more prestigious underwriters are likely to exhibit substantially less‐aggressive earnings management. Conversely, we find the existence of a negative relationship between earnings management and the post‐offer performance of an IPO firm’s stocks only for those firms associated with less‐prestigious underwriters.     

Does aggressiveness help? Evidence from IPO corruption and pricing in China

Using a unique database of Chinese firms bribing initial public offering (IPO) regulators, we examine the impact of bribing on IPO pricing. Our findings suggest that bribing firms are younger, smaller, more volatile in their operating activities, and more generous in compensating underwriters and management. Most important, bribing firms price their IPO shares more aggressively than non-bribing firms and exhibit a higher price-to-earnings ratio, lower first-day return, and poorer post-IPO stock performance. Additional analyses suggest that both bribing and non-bribing firms exhibit negative announcement returns after the arrest of corrupt officials. However, the effect is stronger for bribing firms. Overall, bribing firms are systematically more aggressive than their non-bribing counterparts. They concede less to IPO investors and reward underwriters and management for helping them access the capital market.     

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.     

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.

     

A Test of the Signaling Value of IPO Underpricing with REIT IPO-SEO Pairs

The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firms true worth such that good quality firms issue seasoned equity at favorable prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95 percent of net income as dividends, REIT managers are hard pressed to raise capital through seasoned equity. Consequently, the signaling link between IPOs and SEOs is critical for REITs. Consistent with the signaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricing results in larger joint amount of capital raised through an IPO-SEO pair, and (3) firms that underprice IPOs underprice SEOs as well. IPO underpricing does not mitigate the valuation loss associated with seasoned offerings, however.     

Relationship-Specific Assets and the Pricing of Underwriter Services

This paper investigates the effect of setup costs on the pricing of investment banking services. The existence of setup costs is predicted to result in lower underwriter spreads in IPOs for firms that are expected to issue again. Consistent with this prediction, I find significantly lower spreads for firms that make subsequent issues. I also find that a firm's likelihood of changing underwriters in a subsequent offer is related to the time between offerings and the underwriter's pricing performance in the IPO. These results suggest that the deviations from optimal IPO pricing carry a penalty for the underwriter.     

The partial adjustment of IPO prices to public information and issuing methods in Taiwan

Using 1997 to 2009 exchange-listed data, we examine the treatment of public information by underwriters throughout the entire initial public offering (IPO) price-setting process in Taiwan. We find that regardless of which mechanism (fixed-price, auctions, or book-building) an issuer has chosen, the partial adjustment of the IPO offer prices to public information is evident in our study. Although both fixed-price and book-built issues show a modest but statistically significant relationship between market returns and the level of initial returns, we find economically meaningful effects for both issuing methods. Our findings also demonstrate that auctioned IPOs exhibit strong evidence of partial adjustment to market returns. That is to say, the estimated effect is statistically and economically significant. Therefore, we attempt to provide rational explanations for such phenomena.     

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.     

The Impact of the Corporate Control Market on IPO Decisions

Entrepreneurs who take their firm public during an active corporate control market face an increased risk of losing control through a takeover. I examine the extent to which the threat of takeover impacts IPO firms’ decisions and find that an active takeover market in an IPO firm's industry increases the probability that the firm incorporates in a state with state‐level antitakeover provisions. IPO firms backed by venture capital investors and reputable underwriters are less likely to incorporate in a state offering antitakeover provisions. A closer examination of equity carve‐outs suggests that control is not a first‐order consideration for some IPO firms.     

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.