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.     

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.     

HIGH-TECH IPOS: A TALE OF TWO CONTINENTS

The typical price behavior of an initial public offering (IPO), consisting of a price upsurge on the first trading day followed by subpar performance in the (longer-run) after-market, is one of the most intriguing puzzles in corporate finance. This study focuses on high-tech IPOs in Europe and the U.S. over the period 1998–2001, both to compare the European and U.S. IPO markets and to determine how the price behavior of high-tech IPOs compares to that of IPOs in general. Average initial-day returns were 39% and 64% for the European and U.S. samples, respectively. The median returns were significantly lower, however, indicating that the sample averages are affected by a small group of exceptionally strong performers. But, for the first full year of trading, the median market-adjusted returns were negative for both samples. Not surprisingly, this substandard aftermarket performance was most apparent in companies that failed to generate operating profits.
As with IPOs in general, high-tech IPOs showed higher initial-day returns in "hot" markets than in "cold." Strong first-day performance was a good predictor of IPO volume in the high-tech market, with strong first-day returns triggering a flood of IPOs in subsequent months. Overall, then, the authors' study concludes that the price behavior of high-tech IPOs provides an exaggerated version of the general tendency of IPOs to be underpriced initially but underperform over the longer term.     

The pricing of U.S. IPOs by seasoned foreign firms

We examine the pricing of U.S. initial public offerings (IPOs) by foreign firms that are already seasoned in their domestic countries. Presumably, these equity offers have less downside risk for investors than typical IPOs since domestic share prices can be used to help establish a preoffer value for the firm's equity. In spite of the presumed diminished downside risk, we find that offers by firms from countries that impose foreign ownership restrictions and capital controls are on average underpriced, experiencing an average first-day return in the United States of 12.7%. This result stems in part from the underwriter's failure to price the issue to fully reflect the postoffer premium that often arises for the U.S. shares. In contrast, offers by firms from countries without ownership restrictions have an average first-day return of 0.0%.     

The Underpricing and Excess Returns of Initial Public Offerings in Taiwan Based on Noisy Trading: A Stochastic Frontier Model

Initial public offerings (IPOs) are typically offered at prices lower than the transaction price in the early aftermarket. With a stochastic frontier model, we measured the fair offer price of an IPO and then the deliberate IPO underpricing and the market misvaluation based on the estimated fair offer price. Our results show that IPOs are deliberately underpriced. The extent of noisy trading leading to significantly higher market transaction prices explains the excess IPO returns. We conclude that initial IPO returns result primarily from the noisy trading activities instead of the deliberate IPO underpricing.     

THE LONG-RUN PERFORMANCE OF CONVERTIBLE DEBT ISSUERS

We examine the long-run operating and stock price performance of 828 convertible debt issuers. Relative to matched, nonissuing firms, convertible debt issuers have small improvements in operating performance before the offer and significant declines in operating performance from pre- to post-issue. We examine the relation between several factors and operating performance. We find that for some pre- to post-issue periods, operating performance changes are positively related to firm leverage and the callability of the bond, and negatively related to performance run-up before the offer and investment in new assets. We also find some evidence that firms that issued equity in the three years before their convertible debt issue have larger declines in performance after the offer. Relative to matched, nonissuing firms, convertible debt issuers have superior stock price performance before the offer and significantly poor performance after the issue.     

The Post-Issue Market Performance of Initial Public Offerings in China's New Stock Markets

In this paper, we investigate the post-issue market performance of initial public offerings (IPOs) in China's new stock markets. Our analysis focuses on whether and how institutional features unique to China differentially affect IPO performance. These features include the existence of dual-class shares for the same underlying firms (A-shares issued to domestic investors and B-shares issued to foreign investors) and the unusually long time lag between the offering and listing dates. Our sample consists of 277 A-share and 65 B-share IPOs that were listed on China's new stock markets during the 1992–1995 period. Our study has a number of interesting results. First, A-share IPOs are much more severely underpriced during the initial return period than B-share IPOs. Second, B-share IPOs underperform A-share IPOs (and the market) during the post-issue periods for up to three years. Third, the results of multivariate regression analyses strongly suggest that economic factors determining the post-issue performance of IPOs differ across the A-share and B-share samples.     

Underpricing and aftermarket performance of American depositary receipts (ADR) IPOs

American depositary receipts (ADRs) are negotiable instruments representing foreign company shares traded in US dollars in the US capital market. We present comparative analyses of the pricing and aftermarket performance of Initial Public Offerings (IPOs) by ADRs and a matching sample of US firms over the 1990–2001 period. Offered by large, well-known multinationals, ADR IPOs go through a detailed scrutiny, and incur significant costs, during the pre-IPO period to recast financial statements in conformity with SEC rules and the US GAAP. This mitigates the information asymmetry between the IPO firm and investors. We categorize the ADR issuing country as developed or emerging, and our sample includes several cases of privatization of state owned corporations. The analyses indicate that (1) ADR IPOs are significantly less underpriced than comparable US IPOs; (2) IPOs from developed countries are more underpriced; and (3) Privatization IPOs are less underpriced than non-privatizations. The lower underpricing of ADR IPOs persists even after differential IPO attributes, the traditional proxies for information asymmetry and, the unique characteristics associated with ADR IPOs, are accounted for. We conclude that extant literature offers only partial explanation for this puzzling phenomenon.     

The effect of state antitakeover laws on the firm's bondholders

We examine how state antitakeover laws affect bondholders and the cost of debt, and report four findings. First, bonds issued by firms incorporated in takeover-friendly states have significantly higher at-issue yield spreads than bonds issued by firms in states with restrictive antitakeover laws. Second, firms in takeover friendly states have significantly higher leverage than their counterparts in restrictive law states. Third, bond issues are associated with negative average stock price reactions among firms in takeover-friendly states, but positive stock price reactions among firms in restrictive law states. Fourth, existing bond values increase, on average, upon the introduction of Business Combination antitakeover law. These results indicate that state antitakeover laws tend to decrease bond yields and increase bond values, which is the opposite of their effect on equity values. This, in turn, implies that state laws help mitigate the agency cost of debt by shielding bondholders from expropriation in takeovers. Overall, the empirical evidence suggests that the effect of antitakeover provisions on firm value must take into account the impacts of both bondholders and stockholders.     

Earnings management and IPO anomalies in China

This paper empirically examines the impact of earnings management and investor sentiment on IPO anomalies using a sample of 506 Chinese IPOs issued over the 1998–2003 period. We develop a parsimonious pricing model in which both the offer price and the short-term aftermarket price are influenced by the use of earnings management, and show that the offer price can be below the fair price while the short-term equilibrium price in the aftermarket can be overvalued due to investor sentiment. Consistent with the overreaction hypothesis, the empirical results reveal a positive relation between the initial return and managed accruals and a negative relation between the long-term stock performance and the initial return. Earnings management appears to generate a pattern where the initial price following an IPO tends to be inflated by overreaction in the secondary market but adjusts to its fundamental level in the long run. These findings are robust across a variety of test specifications.     

Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?

One of the puzzles regarding initial public offerings (IPOs)is that issuers rarely get upset about leaving substantial amountsof money on the table, defined as the number of shares soldtimes the difference between the first-day closing market priceand the offer price. The average IPO leaves $9.1 million onthe table. This number is approximately twice as large as thefees paid to investment bankers and represents a substantialindirect cost to the issuing firm. We present a prospect theorymodel that focuses on the covariance of the money left on thetable and wealth changes. Our reasoning also provides an explanationfor a second puzzling pattern: much more money is left on thetable following recent market rises than after market falls.This results in an explanation of hot issue markets. We alsooffer a new explanation for why IPOs are underpriced.     

Are IPOs really overpriced?

Purnanandam and Swaminathan [Purnanandam, A., Swaminathan, B. 2004. Are IPOs really underpriced? Review of Financial Studies, 17, 811–848.] find that IPOs are overvalued at the offer price relative to value metrics based on industry peer price multiples. I discuss some possible problems in their valuation methodology and find that IPOs are not overvalued after steps are taken to address the problems. More importantly, when I examine the long-run performance of IPO firms and their industry peers, I find that IPOs do not underperform their industry peers in the 5 years after IPO. This casts doubt to the argument that IPOs are overvalued.     

An investigation of the short-term performance of the Canadian IPO market.

This article explores the short-term return performance of the Canadian initial public offering (IPO) market. Historically, the Canadian IPO market has shown to be one of the least underpriced markets in the world. This paper uses recent IPOs from 2010 to 2017, and the results confirm that the Canadian IPO market remains one of the least underpriced IPO markets in the world. The mean (median) first-day returns show that Canadian IPOs are marginally underpricing at only 1.45% (0.24%) during the sample period. Additional short-run return measures indicate that Canadian IPOs underperform the market in their 1-month, 6-month, and 12-month holding periods. This research also contributes to the existing IPO literature by showing that restricted voting share offerings tend to be more underpriced and perform poorly over the short-term.     

Credit ratings and IPO pricing

We examine the effects of credit ratings on IPO pricing. The evidence from U.S. common share IPOs during 1986–2004 shows that when firms go public, those with credit ratings are underpriced significantly less than firms without credit ratings. Credit rating levels, however, do not have a significant effect on IPO underpricing. The existence of credit rating reduces uncertainty about firm value. It is the value certainty that matters, not the value per se. Credit ratings also reduce the degree of price revision during the bookbuilding process and the aftermarket volatility in the post-IPO period. The evidence suggests that credit ratings convey useful information in reducing value uncertainty of the issuing firms as well as information asymmetry in the IPO markets.     

The Underpricing of Insurance IPOs

The previous literature documents that insurance initial public offerings (IPOs) are less underpriced than those of noninsurance firms. This difference is usually attributed to lower information asymmetry for regulated firms. However, we find that once one controls for the file price adjustment insurance IPOs, both stock and mutual, are no less underpriced than other noninsurance offerings suggesting the book-building process resolves any such information asymmetries. We also find that mutual IPOs appear more underpriced than stock insurance IPOs, but this difference is related to the differences in pre-issue managerial ownership.     

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。     

The Performance of Private Equity‐Backed IPOs

My paper examines the aftermarket performance of private equity‐backed initial public offerings (IPOs) and compares it to the performances of equivalent samples of venture capital‐backed and other nonsponsored issues on the London Stock Exchange during the period 1992‐2005. The evidence suggests marked differences across the three groups in terms of market size, industry classification, first‐day returns, and key operating characteristics at the time of flotation. In fact, private equity‐backed IPOs are larger firms in terms of sales and assets, more profitable, and relatively modest first‐day returns. In the three years following the public listing, they display better operating and market performance when compared to other IPOs and the market as a whole.     

Debt Structure Adjustments and Long-Run Stock Price Performance

We examine the long-run implications of debt structure adjustments using a sample of U.S. bond IPOs from 1971 to 1994. Bond IPOs result in simultaneous and pronounced changes in both debt maturity and debt ownership structures. We document that firms engaging in debt IPOs substantially underperform their size-and-book-to-market-matched benchmarks by 33.39 and 55.99% over the 3- and 5-year post-offer periods. Our results are strikingly similar to those reported for equity offers but contrast the evidence for seasoned debt offers. We find evidence that debt IPOs are timed to coincide with the market having the highest expectations concerning firms' prospects. A negative relation is documented between debt maturity and future growth opportunities. In part, the underperformance can be attributed to significantly reduced growth opportunities following the offering. Post-offer underperformance is more pronounced for (a) longer maturity issues and (b) firms that do not experience an increase in bank monitoring. Journal of Economic Literature Classification Numbers: G12, G24, G30, D82.     

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.