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.     

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.     

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 Short– and Long–run Performance of New Listings in Tunisia

This study examines abnormal stock market returns of new listings on the Tunisian Stock Exchange. Substantial positive abnormal returns are found on the first listing day and this finding is similar to that obtained in other countries. Subsequent performance is poor and investors who bought shares at the close of trading on the first day would have lost about 22% against the Tunis Stock Exchange index over a three–year period. The possible causes of this are investigated. Among the factors found in the literature that possibly affect the level of long–term performance, only the state of the IPO market, the initial return, the delay in reaching the ‘first market price’ and the size of the firms have significant coefficients. This result is supportive of the traditional fad’s interpretation of long–term underperformance.     

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.     

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.     

Auction Fever! How Time Pressure and Social Competition Affect Bidders’ Arousal and Bids in Retail Auctions

Auction sites on the Internet frequently put bidders under time pressure or highlight the social competition that is inherent to auctions. Both aspects are believed to elicit an exciting shopping experience, which may culminate in auction fever. In two laboratory experiments, we investigate the process of auction fever in retail auctions and demonstrate when and how auction fever affects bidding behavior. In contrast to previous studies, we employ physiological measurements as an objective and continuous assessment of bidders’ arousal in addition to a subjective assessment of bidders’ emotions through psychometric scales. Moreover, we explicitly study the interaction of time pressure and social competition on arousal and bids. We find that bidders’ arousal is increased in high time pressure auctions and that this leads to higher bids in ascending auctions—but only when bidders compete with human opponents. Thus, social competition is the actual driver underlying the auction fever phenomenon. Furthermore, we show that the “joy of winning” is significantly stronger than the “frustration of losing” in ascending auctions. Finally, we discuss the implications of our findings for the design of retail auctions.     

Bidders’ gains and family control of private target firms

This paper examines the announcement returns of bidders acquiring private firms owned by families versus the returns of bidders acquiring non-family controlled private firms. The sample consists of 391 acquisitions of private targets in seven continental European countries for the period 1997–2008. We find evidence that bidder's cumulative announcement returns (CARs) are lower when they acquire family controlled targets compared to non-family controlled targets. We show that this result holds regardless of whether the deal is paid with shares or cash and whether or not the bidding firm is also privately owned. Moreover, the result is independent of the size of the acquisition relative to the size of the acquiring firm. Our findings are consistent with the notion that the bidder has to pay a higher price in order to convince the family owners to sell in return for giving up private benefits.     

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.     

Strategic Bidding for Multiple Units in Simultaneous and Sequential Auctions

A buyer in an electronic marketplace may be interested in buying a bundle of items, where any one item in the bundle may not be of particular interest. The emergence of online auctions allow such users to obtain bundles by bidding on different simultaneous or sequentially run auctions. Because the number of auctions and the number of combinations to form the bundles may be large, the bundle bidding problem becomes intractable and the user is likely to make sub-optimal decision given time constraints and information overload. We believe that an automated agent that takes user preferences and budgetary constraints and can strategically bid on behalf of a user can significantly enhance user profit and satisfaction. Our first step to developing such an agent is to consider bundles containing many units of a single item to be bought from auctions that sell only multiple units of one item type. We assume that users obtain goods over several days. Expectations of auctions and their outcome in the future allow the agent to bid strategically on currently open auctions. We present an expected utility based strategy to decide how many items to bid for in the current auctions, and the maximum price to bid for each item. We evaluate our proposed strategy in different configurations by varying the number of items sold per auction, number of concurrently running auctions, expected closing prices, etc. We simulate several multiple unit English auctions per day, over multiple days, where most of the bidders bid their true utilities drawn from a distribution. The strategic bidding agent has knowledge of this distribution and uses it to determine its bids. A strategic agent who looks farther ahead into the future produces larger returns when there are few strategic bidders. We also evaluate the effect of risk attitudes on the relative performance of the bidders.     

Market Timing With Moving Averages

I present evidence that a moving average (MA) trading strategy has a greater average return and skewness as well as a lower variance compared to buying and holding the underlying asset using monthly returns of value‐weighted US decile portfolios sorted by market size, book‐to‐market, and momentum, and seven international markets as well as 18,000 individual US stocks. The MA strategy generates risk‐adjusted returns of 3–7% per year after transaction costs. The performance of the MA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at‐the‐money protective put on the underlying buy‐and‐hold return. Conditional factor models with macroeconomic variables, especially the default premium, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the MA strategy.     

Overreaction in ChiNext IPOs' initial returns: How much and what caused it?

This paper studies overreaction in initial returns for ChiNext IPOs. We hypothesize the initial return contains a fundamental underpricing and an overreaction. The fundamental is represented by the 21st day return and the difference between the initial and 21st day returns represents overreaction. We investigate this conjecture and identify the variables that are significant for both returns, for one but not for the other, and for the difference. The initial return is driven more by short-term and market factors that cause overreaction while the 21st day return is affected more by an issuer's fundamentals. The overreaction is only weakly time-varying.     

The impact of jump bidding in online auctions

This paper reports findings of two field studies, conducted on a local online auction website, that compare bidding strategies in charity and non-charity auctions, focusing on the extent of jump bidding at different stages of auctions. Results indicate that jump bidding is negatively correlated with bidder entry and positively associated with ending prices. These correlations are greatest during the beginning stage of auctions and are substantially larger for charity auctions than for non-charity auctions. Additionally, early-stage jump bidding occurred more often in charity auctions (consistent with bidders trying to drive up prices in charity auctions), ending-stage jump bidding was more frequent in non-charity auctions (possibly used strategically to win the auction). Further, frivolous products tended to sell at a higher proportion of retail value in charity auctions, providing a replication of the results of previous researchers but in a field setting.     

The Disappearing January/Turn of the Year Effect: Evidence From Stock Index Futures and Cash Markets

This study examines the returns, relative to the S&P 500, on cash indices and futures tracking smaller stocks around the turn of the year. While we control for volatility clustering, return autocorrelation in small stock indices, and other calendar effects, our main focus is the evolution of the turn of the year effect through time: in particular, whether the effect is smaller or takes place earlier subsequent to the introduction of the S&P Midcap and Russell 2000 futures in 1993. We find that evidence of a traditional turn of the year effect, in both cash and futures, is confined to the pre‐1993 period. Post‐1993, there are no abnormal returns during the turn of the year window as a whole. Interestingly, returns in this period remain high on the last trading day of December, but they are negative across the first five trading days of January. In addition, post‐1993, we often observe significant abnormal returns prior to the traditional turn of the year, i.e., in the pre‐Christmas and post‐Christmas windows. Taken together, our results suggest that market participants may be eliminating the turn of the year effect with the aid of two new futures contracts that are well suited to this purpose. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:755–784, 2004     

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.     

Government Public Policy, Regulatory Intervention, and Their Impact on IPO Underpricing: The Case of Malaysian IPOs

This study examines the impact of government initial public offering (IPO) regulation intending on promoting public policy. The study examines the results of the implementation of a Malaysian government policy in 1976, which mandated that at least 30 percent of any new shares on an IPO offer be sold to the indigenous Bumiputera population or to mutual funds owned by them. The study examined the short-run and long-run underpricing of Malaysian IPOs and found that Malaysian IPOs are highly underpriced compared to IPOs in developing countries, creating a market microstructure effect. It also confirmed that the Malaysian government's regulatory intervention in spite of noble public policy intentions appeared to be the significant factor for the emergence of an average first-day underpricing increase of Malaysian IPOs by 61 percent during the period after the regulatory economic policy was instituted. Furthermore, the study found that this high underpricing persists even for the long run, in contrast to the long-run performance of IPOs in the United States.     

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.     

Assessing marketing risk

A model for assessing the risks specific to a marketing strategy is developed and applied to data generated by executive decisions made in the Markstrat environment. The specific risks of a marketing strategy are those associated with changes in primary demand and market share. The riskiness and profitability of different strategies are assessed statistically. Primary-demand risk and return on investments are found to be positively correlated. More volatile, risky, market segments yield higher average returns. The strong temptation to harvest market share is isolated in the positive correlation between harvesting risk and rate of return. The pressure not to build long-term positions is found in the high negative correlation between building risk and return on investments. Overall, the model successfully explains risk-taking behavior in the Markstrat environment, and offers theoretical direction for future research in the real world.     

Timing the Market with a Combination of Moving Averages

A combination of simple moving average trading strategies with several window lengths delivers a greater average return and skewness as well as a lower variance and kurtosis compared with buying and holding the underlying asset using daily returns of value‐weighted US decile portfolios sorted by market size, book‐to‐market, momentum, and standard deviation as well as more than 1000 individual US stocks. The combination moving average (CMA) strategy generates risk‐adjusted returns of 2% to 16% per year before transaction costs. The performance of the CMA strategy is driven largely by the volatility of stock returns and resembles the payoffs of an at‐the‐money protective put on the underlying buy‐and‐hold return. Conditional factor models with macroeconomic variables, especially the market dividend yield, short‐term interest rates, and market conditions, can explain some of the abnormal returns. Standard market timing tests reveal ample evidence regarding the timing ability of the CMA strategy.