DIFFERENTIAL INFORMATION AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS: AUSTRALIAN EVIDENCE

This paper provides evidence on underpricing in Australia using 340 industrial initial public offerings over the period 1980 to 1990. It aims to explain why underpricing is consistent with rational behaviour by focusing on differential information across IPO firms. We measure differential information along two dimensions, the quality and the quantity of information. We propose that the quality of information is reflected in the reputation of independent advisers to the preparation of the issuing firm's prospectus. Three such independent external advisers are examined: the investigating accountant, the underwriter, and the expert. The results provide strong support for the reputation effect of the underwriter on underpricing. Although there is evidence showing a negative relation between underpricing and the reputation of the investigating accountant and the expert, it is not significant. Our results also support the differential quantity of information hypothesis. Firms with more information available are, on average, less underpriced.     

INFORMATION ASYMMETRY AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS: FURTHER EMPIRICAL EVIDENCE

Information Asymmetry is usually assumed in most explanations of the underpricing of initial public offerings (IPOs). In Baron's (1982) model, the underwriter is better informed than the issuing firm concerning the demand for the IPO. The greater uncertainty associated with the demand will lead to a greater underpricing due to the enhanced value of the underwriter's expertise. In the case that the issuer is also an informed investment banker, Baron's hypothesis predicts no underpricing. Our results based on Canadian investment bankers do not support Baron's hypothesis.     

THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS,EX ANTE UNCERTAINTY,AND PROXY SELECTION

This paper reconsiders the prediction that the underpricing of IPOs is increasing in ex ante uncertainty by objectively establishing proxies for ex ante uncertainty on definitional grounds rather than by appealing to intuitive arguments. Based on a sample of 420 U.S. IPOs from the period 1976–1985, the results suggest that there is a hierarchy of proxies. The results also support the prediction of a positive relation between underpricing and ex ante uncertainty. Finally, the results suggest that as the effectiveness of a selected proxy as a measure of ex ante uncertainty increases, so does the strength of the relation between the degree of underpricing and ex ante uncertainty as measured by that proxy.     

THE UNDERPRICING OF “SECOND” INITIAL PUBLIC OFFERINGS

The underpricing of initial public offerings (IPOs) of equity represents a well-documented empirical phenomenon. One prominent explanation for this underpricing relies on the uncertainty investors feel about the value of the issuer. In this paper, this asymmetric information hypothesis is tested by examining the underpricing of IPOs of seventy-four firms for which the uncertainty about the value of the firm is likely to be substantially reduced. These firms were once publicly owned, then taken private, and subsequently returned to public ownership. Findings show that the IPOs of these “reverse leveraged buyouts” are significantly less underpriced than typical IPOs. These results support the asymmetric information hypothesis.     

THE SURVIVAL OF INITIAL PUBLIC OFFERINGS IN THE AFTERMARKET

We estimate an accelerated failure time (AFT) model to investigate the effects of several characteristics suggested as indicators of firm survival for initial public offerings (IPOs). The results indicate that the survival time for IPOs increases with size, age of the firm at the offering, the initial return, IPO activity level in the market, and the percentage of insider ownership, while the survival time decreases with increases in the general market level at the time of the offering and the number of risk characteristics. Additionally, the survival time is negatively affected if the IPO is in the computer and data, wholesale, restaurant, or airline industries and positively affected if the IPO is in the optical or drug industries.     

INITIAL PUBLIC OFFERINGS: GOING BY THE BOOK

In the U.S., and increasingly in other countries as well, IPO securities are marketed to investors in a process known as "book-building"—one that amounts to polling institutional investors to establish a demand schedule for the issue and then allotting stock to individual investors according to the strength of their professed interest. Although book-building methods require use of discriminatory tactics that have attracted strong criticism from investors and regulators, this article defends such practices by demonstrating that book-building is more efficient than alternative methods. It effectively allows issuers to increase the net proceeds of their offerings by making better use of information about market demand conditions.
In the process of explaining the efficiency of the book-building method, this article also offers a plausible explanation for a phenomenon that has long puzzled economists: the systematic underpricing of IPOs. The key to the success of a book-building effort lies in the use of a strategic pricing and allocation policy designed to offset the investor's incentive to understate his or her interest in an IPO. By committing to favor investors who provide strong indications of interest with relatively large allocations of underpriced shares, the investment bank can limit the distortion of investor's incentives in bidding and so increase the level of proceeds the issuing firm can expect to generate from its IPO.     

AN ANALYSIS OF THE UNDERWRITER SELECTION PROCESS FOR INITIAL PUBLIC OFFERINGS

This study extends previous research that shows prestigious underwriters avoided underwriting smaller, more speculative initial public offerings (IPOs) during a post-SEC period, 1966–77. Estimating a logit model with a sample of 1,192 IPOs from 1977 to 1988, we evaluate the effect of offering characteristics and prevailing market conditions on the probability a prestigious investment banker will underwrite an IPO. Similar to previous studies, we find that prestigious underwriters avoid smaller, riskier issues. However, we also find stock market volatility, interest rate volatility, and the strength and profitability of the recent market for seasoned new issues to be important determinants of a prestigious underwriter's decision to underwrite an IPO.     

DIVERGENCE OF OPINION AND LONG‐TERM PERFORMANCE OF INITIAL PUBLIC OFFERINGS

Miller's hypothesis posits that divergence of opinion can lead to asset overvaluation and subsequent long‐term underperformance in markets (such as initial public offerings [IPOs]) with restricted short‐selling. Consistent with this hypothesis, we find that early‐market return volatility, a proxy for divergence of opinion, is negatively related to subsequent IPO long‐term abnormal returns. This relation holds after accounting for other factors that previous studies suggest affect long‐term abnormal returns for IPOs (including another proxy for divergence of opinion). Moreover, we find that this relation is stronger in IPO markets than in non‐IPO markets (where short‐selling restrictions are less stringent), again consistent with Miller's hypothesis.     

PRICE PERFORMANCE OF INITIAL PUBLIC OFFERINGS OF MASTER LIMITED PARTNERSHIP UNITS

This paper is the first to provide evidence on the pricing of initial public offerings of master limited partnerships (MLPs). A sample of fifty MLP offerings from January 1983 through July 1987 is analyzed. No significant underpricing (or overpricing) is found for the sample taken as a whole, although some slight overpricing is found for certain industry subsamples. These findings are in sharp contrast to the pervasive evidence from previous studies that document significantly positive initial returns for common stock initial offerings.     

THE INTERVENING EFFECTS OF PARTICIPATION ON THE RELATIONSHIP BETWEEN PROCEDURAL JUSTICE AND MANAGERIAL PERFORMANCE

Prior studies have suggested that the subordinates’ perception of fairness in their organizations’ procedures is related to improvements in the subordinates’ performance. However, the positive relationship between perception of justice and performance may not be a direct one, but is indirect via the intervening variable of participation. It is likely that the importance of maintaining procedural fairness in the organization will lead senior managers (superiors) to select procedures that allow their subordinates more participation privileges in the organization’s affairs because high participative procedures are perceived to be fair. This increase in participation, in turn, is likely to improve the subordinates’ performance. The results, based on a path analytical model and a sample of 83 senior managers, indicate that procedural justice has an indirect effect on performance via participation. On the basis of these results, it is possible to conclude that the importance of procedural fairness in the organization leads to the selection of procedures with high subordinates’ participation, which, in turn, leads to high managerial performance.     

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.     

DISPOSITION EFFECT AND PUBLIC SECONDARY EQUITY OFFERINGS

Shareholders selling shares in public pure‐secondary equity offerings are affected by the disposition effect and tend to sell past winners. Selling shares in these offerings is associated with significant indirect offer costs. On average, shares are offered at a 5.5% discount from the market price. Moreover, shares of offering firms are about 8% underpriced. Offer discounts and underpricing are positively related to the proxy for the disposition effect. Our findings are consistent with the proposition that the disposition effect increases the supply of winning stocks and depresses their prices.     

ANNOUNCEMENT EFFECTS OF WITHDRAWN SECURITY OFFERINGS: EVIDENCE ON THE WEALTH REDISTRIBUTION HYPOTHESIS

This paper employs the comparison period returns approach to examine issuance and withdrawal announcement effects for stock portfolios of firms announcing equity or debt issues that are subsequently withdrawn. In contrast to previous literature, which generally attributes financing announcement effects to capital structure changes, the conclusion of this paper is that security price changes at the time an issue is announced or withdrawn prevent wealth redistributions between insiders and outsiders. Empirical findings are inconsistent with the interpretation of announcement effects as capital structure effects.