Price limits,investor sentiment,and initial public offering underpricing: A quasi-natural experiment based on ChiNext

Based on the data on initial public offerings (IPOs) listed on Growth Enterprises Market (ChiNext) in 2009–2018, this paper examines the impact of first-day listing price limits on IPO underpricing by adopting the event study and regression discontinuity design models. Our research indicates that the implementation of price limits significantly increases IPO underpricing by intensifying investor sentiment and encouraging market speculation. We also find that price limits have different impacts on companies with different characteristics such as innovation capacity and ownership structure. Our research may suggest how to improve the effectiveness of regulatory policy as well as current ChiNext and IPO market reforms.     

The role of internationalization on the IPO performance of service firms: Examination of initial returns,long-run returns,and survivability

This study examines the effect of internationalization on the initial and long-run IPO performance of service firms. The study discusses that pre-IPO internationalization of service firms contributes to the explanation of long-discussed IPO underpricing phenomenon, and underperformance of IPOs in the long-run. Sample of the study includes 1822 IPO issues conducted by US service firms between 1980 and 2009. Findings of the study suggest that international service firms leave less money on table in their IPOs compared to domestic service firms by providing significantly lower first day returns to their investors on their first day of public trading. Moreover, our findings provide evidence that 3-year cumulative abnormal returns and 3-year buy-and-hold returns of international service firms are significantly higher than domestic service firms, and international service firms outperform domestic service firms in both operating return on assets and operating cash flows in the post-IPO period. Lastly, the study documents that survival rate of service firms subsequent to an IPO issue increases with pre-IPO internationalization.     

Disclosure of Downside Risk and Investors' Use of Qualitative Information: Evidence from the IPO Prospectus's Risk Factor Section

I use the context of a company's initial public offering (IPO) of equity securities as a capital‐market setting to empirically study the economic consequences of risk factor disclosures. Using data from Australian IPOs, I examine the relation of textual risk disclosures in the prospectus to initial underpricing. I find that the quantity of disclosures in the risk factor section itself has no significant impact on initial underpricing. However, an increase in the informativeness of risk factor disclosures is associated with lower IPO underpricing. My results suggest that IPOs that provide informative risk factor disclosures have less ex ante uncertainty, in the sense that the disclosures help investors estimate the dispersion of secondary market value. The effect of informative risk factor disclosures on IPO underpricing is more pronounced for IPOs with less prestigious lead underwriters and is mainly driven by younger firms, smaller firms, and firms with poorer operating performance prior to their IPOs. Collectively, my findings suggest that informative disclosures of downside risk are useful for investors to evaluate IPOs.     

The Distribution of IPO Holdings Across Institutional Mutual Funds

We examine initial public offering (IPO) holdings in the mutual funds of four large investment banks and five large non-investment banks during the period 1997 through 2002. Investment banks hold IPOs with different characteristics than IPOs held by non-investment banks, and they also tend to hold IPOs in different types of funds than non-investment banks. We classify holdings as to whether the IPO lies outside or inside the fund’s objective. Investment banks hold IPOs outside the fund objective in 27% of the fund/IPO pairs while non-investment banks hold outside their objective in just 5.4% of fund/IPO pairs. We see significant differences in IPO underpricing for both groups as well. For example, when non-investment banks hold IPOs outside a large capitalization fund objective, they select IPOs with 52% higher underpricing as measured by first-day returns.     

Economic freedom and IPO underpricing

This paper examines how the difference in institutional environments constitutes differential IPO underpricing across countries. Using the Heritage Foundation’s Index of Economic Freedom (IEF) as a proxy for the heterogeneous institutional environment, and a sample of 3728 IPOs from 22 countries and regions over the period 1993–2014, we find that countries with higher economic freedom have significantly less serious IPO underpricing problems. Moreover, we find that among the 10 economic freedom factors covered by theIEF, financial freedom related factors play a more important role in reducing the IPO underpricing problem. Finally, consistent with the market sentiment hypothesis, we find strong evidence that pre-IPO market sentiment influences IPO first-day returns, and that the IPO underpricing problem is less severe when the market is bearish.     

The Effects of Industrial Policy Support on IPO Performance: Evidence from Listed Enterprises of the Chinese SMEs Board

This study examines the effects of industrial policy support on the initial public offering performance of listed enterprises on the Chinese small and medium‐sized enterprises board. We observe that industrial policy support has a positive effect on IPO performance. In addition, we provide evidence that after the financial crisis, the decrease of IPO underpricing resulting from policy support implemented three months before firms going public is less than that deriving from the policy support issued six months prior to listing, whereas the effect of industrial policy support on post‐IPO operating performance has increased after the financial crisis.     

媒体关注对IPO抑价影响路径探究——基于创业板的经验证据

文章重点探讨媒体关注对我国IPO抑价影响的具体路径。基于上市公司IPO及之前的媒体信息,选取创业板IPO公司作为研究样本,从行为金融学视角对抑价理论进行实证检验。经路径研究发现,高媒体关注通过配置投资者“有限注意力”导致高发行抑价,在个人投资者比例较高的创业板市场上,媒体关注对IPO抑价的影响路径是基于情绪效应而不是认知效应。     

Underpricing in new equity listings: A conceptual re-appraisal

This paper appraises the existing approaches used to measure the underpricing of Initial Public Offerings (IPOs). The conceptual problems surrounding the measurement of IPO underpricing are noted to be significant and suggest that underpricing costs and returns may need to be evaluated with reference to the particular characteristics of individual offerings. For example, details of the number of primary shares on offer, the effect on corporate control of listing, the information effects resulting from listing, the liquidity of shares pre-offer, the impact of speculative activity on post-listing firm value and, finally, the actual dating of an IPO may all need to be considered. In short, the existing measures suggested for IPO underpricing do not allow managers/owners in IPO firms or investors in IPO stocks to assess, unequivocally, the respective costs and returns from underpricing in such issues.The authors would like to acknowledge the helpful comments of an anonymous reviewer.     

Strategic behavior of insiders in initial underpricing and long-run underperformance

We study strategic behavior of insiders in ChiNext IPOs. Since traditional initial underpricing is not appropriate due to the jawbone P/E ratio approach and maximum initial return cap we propose two alternative measures. We identify a significantly positive relationship between insiders' shareholdings and initial underpricing. With no discretion on IPO offer price, the insiders implement earnings management to maintain higher stock prices induced by regulatory changes and high market demand and to facilitate selling their unlocked shares after lockup expiration. We confirm a negative impact from insiders' share sales on long-term performance but don't observe a dramatic underperformance as documented.     

Does reputation of sponsors matter in IPO? Evidence from Hong Kong

Contrary to other markets where underwriters perform a combined role of underwriting and sponsoring in an Initial Public Offering (IPO), IPO issuers in Hong Kong must appoint at least one sponsor in addition to the underwriters. The splitting of the single role of underwriters into two separate ones offers an ideal setting to disentangle the effects of the two roles and to examine which of the two roles—sponsor or underwriter—is more important in explaining IPO underpricing and initial volatility in the Hong Kong equity market. Interestingly, our findings provide supportive evidence that the sponsor reputation does matter in an IPO and it is even more significant than the underwriter reputation in explaining the IPO underpricing phenomenon. Given the recent high-tech fervor, our research goes deeper to examine specifically the role of sponsors on high-tech firms, with results indicating that the reliance on sponsors is higher for traditional issuers than for technology firms. We further discover that sponsors and underwriters are playing substitution roles rather than complementary roles. In order to examine the regulatory policy impact, our research also compares the role of IPO sponsors before and after the launch of the new sponsor regulatory regime in 2013. The empirical findings lend support to our argument that after the launch of the new regulations, public awareness of sponsors is raised, respect towards more reputable sponsor increases, and thus, the role of sponsors becomes more important than before.     

Venture capital investors and foreign listing choices of Chinese companies

We investigate the listing choice of Chinese VC-backed companies between a domestic market and foreign stock markets. Using a comprehensive sample of 2249 IPOs of Chinese companies that went public during the 1994–2013 period, we find that companies backed by Chinese domestic VCs are significantly less likely to list abroad while those backed by foreign VCs or co-invested by foreign and domestic VCs are significantly more likely to do so. We further find that the introduction of a domestic stock market for high-tech start-ups (the ChiNext Board) significantly reduces the likelihood to list abroad. However, the effect of VC participation largely disappears after the introduction of the ChiNext Board, in that the companies backed by foreign or co-invested VCs are more likely to list domestically. Moreover, we find that VC-backed IPOs have larger issuance sizes, but we find no impact on IPO underpricing of these Chinese companies. These results on IPO outcome hold for both the full sample and a matched sample using propensity score matching.     

承销费用、政府定价管制与 IPO 抑价--来自中国首次公开发行公司的经验证据

选择2001年11月1日至2012年12月31日的中国A股IPO公司为研究样本,分析承销费用与IPO抑价之间的关系及其在政府定价管制程度不同情况下对承销费用与IPO抑价关系的影响。结果显示,承销费用与IPO抑价呈正相关关系;而政府定价管制程度的提高会削弱承销费用与IPO抑价之间的正相关关系,甚至会使其转向负相关关系。     

Factors influencing the choice between founder versus non-founder CEOs for IPO firms

Despite the innate advantage founder CEOs have by virtue of their founding vision, organizational influence, positive image, and ownership stakes to lead their firms at their initial public offering (IPO), extant empirical evidence indicates that between a third to half of IPO firms go public with non-founder CEOs at the helm. Relatively little however, is known regarding factors that influence the choice of founder versus non-founder CEO for firms issuing IPOs. This study examines the impact of factors such as founder characteristics, size of founding team, governance structure, ownership structure, top management team independence, venture capitalist influence, and the demand for equity financing on the probability of founder CEO at IPO.     

Effects of differential information on the after-market valuation of initial public offerings

This paper examines the after-market for initial public offerings (IPOs), particularly the security valuation effects of structural differences in available information. There is a diversity of information among issuing firms at the time of their offering and particularly under certain market conditions. Because this diversity decreases with time and after-market trading, the IPO market provides an ideal setting for testing errors due to differential information levels in early after-market valuation of IPO firms. We find evidence that during “hot” market conditions and for firms characterized by low levels of available information, the market values of issuing firms are more likely to be overestimated in the immediate after-market. We also find positive overestimation of market values to be more likely for larger IPOs and for those marketed by the less prestigious underwriters.     

Efficiency in IPO Issuance Processes?

Is the online auction an efficient mechanism for pricing initial public offerings (IPOs)? Its intent was to minimize first day price surges in IPOs, which represented “money left on the table” for issuers. Evidence from Google's IPO suggests that the online auction process may not have minimized the first day price surge, since 82 percent of the IPOs issued in 2004 using the traditional process experienced less of an increase. Furthermore, a comparison of auction IPOs with traditional IPOs issued in the same year and in the same threedigit SIC code suggests that 44 percent of the auction IPOs have greater first day price surges than their traditional counterparts. A broader comparison of the pricing behavior of auction IPOs with traditional IPOs presents a mixed picture and suggests that the size of underwriter may be an important factor. The mispricing that occurs in auctions may be due to an informational asymmetry on the part of small investors. This informational gap could arise because small investors lack access to the information sources that institutional investors have or because companies are not required to provide detailed information in the online process, inasmuch as they don't undergo the rigorous scrutiny of investment banks in the traditional bookbuilding process. This informational gap may be alleviated by the SEC reforms of the “quiet period” and by the issuer providing more detailed information on the uses of the funds.     

How useful is venture capital prestige? Evidence from IPO survivability

This study examines the effect of venture capitalist (VC) prestige on the post-issue survivability of IPOs and how VC characteristics influence the effect. We find that IPOs backed by prestigious VCs are less likely to delist for performance failure and have longer listing duration relative to those without VC backing; however, IPOs backed by ordinary VCs are as likely to delist as IPOs without VC backing. The finding is robust for Internet and high-tech firms. We further examine heterogeneous VC characteristics and find that the ability of prestigious VCs to improve IPO survival is a function of their investment experience and managerial ability. VC prestige characterized by industry specialization and syndication networks is not related to IPO survival. Overall, the results suggest that the VC characteristics that produce prestige, rather than the prestige itself, drive the long-term survival of IPOs.     

Venture capitalist participation and the performance of Chinese IPOs

We examine the effects of venture capitalist participation in IPOs in China and find that VC-backed firms are more underpriced than non-VC firms. Both VC-backed and non-VC-backed IPOs experience long-run underperformance; however, VC-backed IPOs perform significantly better. The higher level of underpricing and cost of going public for the VC-backed firms are consistent with the monitoring role of the VC. Finally, the fact that VC reputation is associated with lower underpricing is consistent with the reputational capital theory, which asserts that reputable VCs use their expertise and experience to minimize underpricing in order to preserve their reputational capital.     

Venture Capitalists, Syndication and Governance in Initial Public Offerings

This paper examines the development of effective boards in venture capital (VC)-backed initial public offerings. It argues that VC-backed IPOs suffer from two sets of agency costs which are related to principal–agent and principal–principal relationships between the founders and members of the VC syndicate. Using a unique sample of 293 entrepreneurial IPOs in the UK it shows that VC syndicates invest in relatively more risky firms. VC-backed IPOs have more independent boards than IPOs with no VC involvement, with board independence being higher in syndicated VC-backed firms. These results are consistent with assumption that these governance factors are used to mitigate agency costs associated with VC involvement in IPO firms. We also find that in syndicated IPOs there is a higher equity presence of passive private equity firms investing alongside VC firms.     

Do Private Equity Investors Create Value for Italian Initial Public Offerings?

This study analyses the role of private equity (PE) backing in initial public offerings (IPOs) using a dataset of 227 companies that went public on the Milan Stock Exchange between January 1995 and December 2007. The evidence rejects the certification and monitoring hypotheses and provides considerable support for the market power hypothesis. In accordance with Chemmanur and Loutskina (2006) , we suggest that PE investors exploit their relationships with the key IPO market players to attract attention to the IPOs of firms backed by PE, thus obtaining a higher equity valuation (both in the IPO and in the secondary market).     

Do political connections matter in accessing capital markets? Evidence from China

We analyze the influence of political connections on firms' access to capital and the ensuing effect on the cost of raising capital. Using a dataset of 413 IPOs from 2009 to 2012, we exploit a research setting where government is still highly involved with the process. We find that firms rely on political connections to reduce IPO rejection risk as a firm's political connections are positively associated with the propensity of obtaining approval for an IPO. We further find that political connections are negatively associated with the cost of IPO and connected firms appear to perform better subsequent to their IPOs.