Adverse selection, public information, and underpricing in IPOs

This paper generalizes the informational environment of the Rock model to address empirical evidence and conjectures that cannot be addressed within the standard model based on informed and uninformed investors such as underpricing being positively related to market returns observed prior to the IPO, the number of IPOs being positively related to market returns, underpricing being partly predictable based on public information, and the return to uninformed participation being negative overall but positively related to market returns observed prior to the IPO. Finally, the model suggests that a positive relation between market returns and underpricing need not represent an inefficiency in the pricing of IPOs.     

IPO initial returns in China: Underpricing or overvaluation?

This paper separates the amount of IPO underpricing(primary market underpricing) and overvaluation(secondary market overvaluation) from the value of an IPO's initial return to evaluate the relative importance of these two factors and their main determinants. Using data on the IPOs of 948 Chinese firms, we find that average initial returns are 66% and that underpricing and overvaluation are between 14–22% and 44–53%, respectively, depending on the method used to assess firms' intrinsic values. In addition, while both the value of the initial return and the extent of overvaluation are significantly negatively related to post-IPO long-run stock performance, overvaluation can predict post-IPO performance better than the value of the initial return. Value uncertainty in IPOs is positively related to both underpricing and overvaluation, and both the underwriter's reputation and the existence of pricing regulation are positively related to underpricing. Investor sentiment has a positive effect on overvaluation but has no effect or a negative effect on underpricing. Overall, our results suggest that in China overvaluation accounts for a larger proportion of the initial return than underpricing,and that underpricing and overvaluation have different determinants.     

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.     

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。     

Do media connections help? Evidence from IPO pricing in China

This study examines how social connections between media executives and firms affect initial public offering (IPO) pricing using manually collected Chinese data. We find media-connected firms receive more frequent and more positive coverage than their unconnected peers, resulting in reduced IPO underpricing. However, media-connected firms have worse post-IPO market performance. Although media-connected firms have better pre-IPO accounting performance, they conduct more earnings management under the cover provided by their connected media. Additional results show that the negative effect of media connections on IPO underpricing is more pronounced for media that are not controlled by the central government and are based in the same city as the firm. It is also more pronounced for firms with less institutional ownership and non-state-owned enterprises. Our results remain valid after various robustness tests, such as alternative proxies for IPO underpricing, eliminating alternative hypotheses, matching analysis, instrumental variable analysis, as well as placebo tests. Collectively, our findings suggest that media connections compromise IPO pricing efficiency.     

Investor interest, trading volume, and the choice of IPO mechanism in France

This paper investigates the relationship between underpricing and investor interest level prior to and after the IPO date. Empirical tests show a significant 3-day buy-and-hold abnormal return of 19.15%. It is positively related to the share demand-to-offer ratio in the pre-market period and to trading volume in the aftermarket. Despite a high initial underpricing for some book-built issues, the book-building procedure allows for more effective pricing and a lower divergence of opinion among investors in the aftermarket than the auction-like procedure.     

Deliberate premarket underpricing and aftermarket mispricing: New insights on IPO pricing

We decompose initial returns into deliberate premarket underpricing and aftermarket mispricing using stochastic frontier analysis. We model deliberate underpricing as a function of proxies of information asymmetry surrounding IPO value between market participants. Equity retained is an unlikely signalling mechanism to convey IPO value to outside investors through deliberate premarket underpricing. The presence of lock-in agreements, underwriter fees, number of uses of proceeds, and venture capital or private equity backing have positive impacts on deliberate premarket underpricing. Demand for firms' capital also explains deliberate premarket underpricing, whereas new issues market conditions have no impact. All these factors are found to explain a significant fraction of the variations in our deliberate underpricing estimates. Deliberate underpricing is the more dominant component that makes up initial return when compared to the fraction of aftermarket mispricing. We attribute aftermarket mispricing to trading volume in IPO shares on the first day, price adjustment between the filing price range and the offer price, and offer size. Equity retained explains the aftermarket mispricing rather than the deliberate premarket underpricing in contradiction to the signalling argument. More reputable underwriters are likely to provide price support in the early aftermarket, whereas we observe no impact on deliberate premarket underpricing.     

What comprises IPO initial returns: Evidence from the Chinese market

We studied the IPO price and long-term performance in China after the adoption of the book-building pricing mechanism. Using comparable firm value, we separated the IPO initial returns into pre-market deliberate underpricing and aftermarket overpricing. This separation enables us to clearly test different theories regarding high IPO initial returns. We find little evidence supporting the classic information theory on IPO underpricing but strong evidence supporting the behavioral arguments regarding IPO overpricing. Even though the results are specific to the Chinese market, we find some general results on what composes and drives IPO initial returns that have been lacking in the IPO literature.     

Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets

Market returns before the offer price is set affect the amountand variability of initial public offering (IPO) underpricing.Thus an important question is "What IPO procedure is best adaptedfor controlling underpricing in "hot" versus "cold" market conditions?"The French stock market offers a unique arena for empiricalresearch on this topic, since three substantially differentissuing mechanisms (auctions, bookbuilding, and fixed price)are used there. Using 1992–1998 data, we find that theauction mechanism is associated with less underpricing and lowervariance of underpricing. We show that the auction procedure'sability to incorporate more information from recent market conditionsinto the IPO price is an important reason.     

机构投资者对IPO定价效率的影响分析

本文通过对沪深两地1996～2006年A股市场IPO样本的研究发现：IPO抑价率与IPO政策变量及机构投资者参与程度显著负相关。机构投资者参与询价和发行配售，对IPO抑价率的降低起到了显著作用，有利于提高市场发行定价效率。总体上看，现阶段中国A股发行市场定价效率仍然偏低。高抑价率的主要原因在于行政管制使股票发行人和承销商的议价能力发挥不足，根本原因还在于发行制度市场化程度不高。     

The Pricing of Equity Carve-Outs

This article examines the pricing of stock for 251 equity carve‐outs during the 1986–1995 period. We document a mean initial‐day return of 5.83% and a mean one‐week return of 5.43%. Among carve‐outs, the initial underpricing is lower for issues represented by high prestige investment bankers and those that have a lower offer price. In comparison with 251 initial public offering (IPO) firms matched by size and book‐to‐market ratio of equity, carveouts exhibit significantly lower initial‐day returns, but their buy‐and‐hold returns for sixmonth and one‐year periods are not significantly different from IPOs. The IPO firms have a three‐year return of 28.82% which is significantly higher than the 21.07% return for the carve‐out firms.     

The impacts of regulation regime changes on ChiNext IPOs: Effects of 2013 and 2020 reforms on initial return,fair value and overreaction

The Chinese version of NASDAQ, ChiNext has gone through three time periods with two different regulation regimes (approval versus registration) and three sets of listing day trading restrictions (trading curbs, hard return caps, and no restrictions). We hypothesize that the initial return of an IPO contains the issuer's fair value proxied by the IPO's monthly return and the investors' overreaction proxied by its intramonth return. We separate the full sample into three non-overlapping periods based on different regulatory rules, apply the Stepwise technique to identify significant variables for the return measures, and use multivariate linear regressions to estimate the signs and magnitudes of the significant variables. We observe stark contrasts among the determinants of return measures under different regulation regimes. We find that IPO pricing is mainly demand-driven under the approval regime, but switches to value-driven under the registration regime. Our findings reveal a clear pattern of evolution in investors' behavior in response to the progression of regulations along three dimensions: 1) governing regulation regimes, 2) listing day trading restrictions, and 3) issuer profile. Our findings provide insights to the continued efforts in moving the Chinese IPO market towards a more market-oriented and transparent environment with higher pricing efficiency.     

Conflicts of interest and China's A-share underpricing

The extremely high A-share underpricing in China's primary market provides us with a very interesting area of empirical research. Previous studies on China's IPO underpricing have been suggestive, but inconclusive. A significant decline in A-share underpricing is found in 2003 relative to previous years (and much less than that recorded in the literature to date). We examine the validity of previous A-share underpricing models, reported in the literature, and find a statistically significant structural break in the data during 2003 when these models are specified. We further explore conflicts of interest in the Chinese IPO market and specify an alternative model to further examine this change in observed market behavior. Our results suggest that a contract with high underwriter's fee leads to less A-share underpricing. Our results also suggest that the asymmetric information hypothesis does not apply in the Chinese IPO market in 2003. Overpricing by the secondary market and the trading activity on the first trading day are the main functions of the A-share underpricing. This study has important implications such as guiding the Chinese government policy regarding the regulations of initial public offering.     

Management of the IPO performance in Thailand

This research aims to explore the relationships between six major IPO elements in Thailand: underwriter reputation, ownership concentration, book-building, IPO allocation, the length of the lock up period, and investor interest and underpricing. The sample comprises 153 IPOs listed between 2001 and 2011. Cross-sectional analysis reveals that IPO allocation appears to be the strongest factor with a negative relation to underpricing. The length of the lock up period, issue size, industry, and hot issue market show significant and positive relationships with underpricing. Underwriter reputation is not associated with underpricing as the choice of underwriter is restricted by the Thai regulator's requirements. Book-building does not explain underpricing. Institutional investors play very limited roles in Thai IPOs. A small change in ownership concentration does not affect underpricing. Nevertheless, a longer lock up period can yield a higher initial return. Such a provision can restrain insider dealing.     

The Opening, Short, Medium and Long Term Performance of Canadian Unit Trust Initial Public Offerings (IPOs)

Abstract:   This paper investigates the initial pricing and performance of Canadian unit trust IPOs over a three‐ to four‐year period and then draws implications for the efficiency of the Canadian market. Overall, the results confirm the following: in the short term, unit trust IPOs are underpriced and outperform the Canadian market; in the medium term, IPOs are fairly priced and neither outperform nor underperform the Canadian market; and in the long term, IPOs are fairly priced but underperform the Canadian market. In addition, our results confirm that the size of underpricing is related to ex‐ante uncertainty about the value of the issue. Ex‐ante uncertainty proxies, namely total risk, exchange listing, relative bid‐ask spread, and relative volume of initial trade, all explain the size of underpricing. When the effects of these factors are controlled, the results confirm that Canadian unit trust IPOs are indeed overpriced in the short term but underpriced in the long term. We conclude that the Canadian unit trust IPO market appears to be inefficient in the short and long term, but over the medium, the market appears to be efficient.     

U.S. exchange upgrades: Reducing uncertainty through a two-stage IPO

We examine the effects on IPO uncertainty of an alternative going-public mechanism – the two-stage IPO, where a firm first gets quoted on the OTC market, and then upgrades to a national exchange where it first issues public equity. We find that a two-stage IPO firm experiences lower underpricing and return volatility than does a similar traditional IPO firm. Our study is the first to analyze the impact of U.S. pre-IPO disclosure and liquidity on levels of uncertainty and pricing at the IPO stage. We find that greater disclosure and liquidity during the first stage leads to greater reduction in IPO uncertainty. We control for the potentially endogenous nature of the two-stage IPOs by using a difference-in-difference analysis that utilizes two exogenous OTC market events.     

Litigation risk, intermediation, and the underpricing of initial public offerings

We formally examine the role of litigation risk in initial publicoffering (IPO) pricing. The underwriter's pricing decision tradesoff current revenue against expected future litigation costs,both of which are increasing in the IPO price. Given a time-consistencyconstraint and rational expectations on the part of investors,however, the 'standard' litigation risk argument does not leadto equilibrium underpricing. We develop a richer model thatprovides sufficient conditions under which there is equilibriumunderpricing. The issuer's choice of employing an underwriterversus floating the IPO on its own is examined, and varioustestable implications of the model are developed.     

Capital market governance: How do security laws affect market performance?

This paper examines the link between capital market governance (CMG) and several key measures of market performance. Using detailed data from individual stock exchanges, we develop a composite CMG index that captures three dimensions of security laws: the degree of earnings opacity, the enforcement of insider laws, and the effect of removing short-selling restrictions. We find that improvements in the CMG index are associated with decreases in the cost-of-equity capital (both implied and realized), increases in market liquidity (trading volume, market depth, and U.S. foreign investments), and increases in market pricing efficiency (reduced price synchronicity and IPO underpricing). The results are quite consistent across individual components of CMG and over alternative market performance measures.     

Laddering in initial public offerings

Laddering is a practice whereby the allocating underwriter requires the ladderer to buy additional shares of the issuer in the aftermarket as a condition for receiving shares at the offer price. This paper identifies factors that create incentives to engage in this type of manipulation and models the effect of laddering on initial public offering (IPO) pricing. I show that laddering has a bigger effect on the market price of IPOs with greater expected underpricing (without laddering) and greater expected momentum in the aftermarket; laddering increases the IPO offer price, the aftermarket price, and the money left on the table but does not necessarily increase the percentage underpricing; laddering contributes to long-run underperformance and creates a negative correlation between short-run and long-run returns; and profit-sharing increases the extent of laddering and the percentage underpricing.