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.     

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.     

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.     

Chinese IPO activity,pricing, and market cycles

We examine the activity, pricing, and market cycles of 1,380 Chinese A share IPOs over the period 1991–2005 and find initial underpricing of 238%. The government restrictions on IPO offer price and quota allocation cause pricing structural breaks and attribute more than half of initial underpricing. A multifactor model that includes firm’s characteristics, excess demand for IPO shares, and the government restrictions explains cross-sectional initial returns, after controlling for industrial differences and stock market conditions. In addition, monthly IPO volume and average initial return are highly correlated. A VAR model indicates that initial return leads IPO volume by 6 months.     

THE EFFECT OF THE TRADING SYSTEM ON IPO UNDERPRICING: EVIDENCE FROM THE 1997 ORDER‐HANDLING RULES

We use a natural experiment resulting from the 1997 Securities and Exchange Commission rule mandating a change in the order‐handling rules (OHR) for all NASDAQ stocks to test whether secondary market structure affects initial public offering (IPO) underpricing. We find that the increase in liquidity that the OHR represent led to a decrease in underpricing for cold NASDAQ IPOs, suggesting that when liquidity is lowest, changes in market liquidity display a negative relation to initial returns.     

Noise from online discussion forums: Evidence from IPOs in China

In this study, we use initial public offerings (IPOs) in China to investigate how online stock forums influence information asymmetry and IPO valuation. The empirical analysis isolates the underpricing and overvaluation components of initial returns. The number of forum comments, postings, and readings are positively associated with initial returns and the degree of underpricing, implying that forums create noise that exacerbates information asymmetry during IPOs. This effect is amplified by the quiet period regulation, which drives investors to rely on online discussion forums to obtain information. Through sentiment analyses of forum posts and media coverage, we find that the negative effect of online forums is more prominent when bad news prevails. We clarify the role of online stock forums in IPO pricing and information asymmetry by separating underpricing from overvaluation in initial returns.     

Do anti-corruption campaigns affect IPO underpricing? Evidence from a central discipline inspection of the CSRC in China

The system of central discipline inspections has become a key anti-corruption governance tool in China since 2013. This paper investigates the impact of a central discipline inspection of the China Securities Regulatory Commission (CSRC) on initial public offering (IPO) underpricing. We find that IPO firms listed during the inspection period exhibit greater IPO underpricing than those listed outside the inspection period. The reason is the increased focus of the CSRC on maintaining capital market stability, which makes it more inclined to approve IPO firms with lower issue prices during the inspection period compared with other periods. We also find that IPO firms listed during the inspection period have better short-term market performance but poorer long-term returns than those listed outside the inspection period. Moreover, the effect of the anti-corruption inspection on IPO underpricing is more pronounced for non-state-owned enterprises, firms with low-quality auditors and firms located in regions with high corruption. Overall, our paper enriches the literature on IPO underpricing and the economic consequences of the central discipline inspection system.     

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.     

Australian IPO pricing in the short and long run

We analyse both initial underpricing and post-listing returns for Australian IPOs. Our results are consistent with the view that unique institutional characteristics may have overwhelmed previous Australian tests of equilibrium models of IPO underpricing. The results also show that Australian IPOs significantly underperform market movements in the three-year period subsequent to listing. Further investigation of these anomalous post-listing returns lead us to reject various ‘speculative bubble’ explanations. Rather, the evidence suggests a curvilinear relationship between initial and subsequent returns, although the economic significance of the relationship is low.     

西方IPO抑价理论及对中国IPO研究的启示

西方IPO抑价理论大多在信息不对称、委托代理、信号显示等信息经济学框架下,基于资本市场的有效性假设而提出的,即假定二级市场对股票的定价是合理的,IPO抑价是源于发行定价偏低.中国A股市场IPO抑价率长期高企但逐年下降,对该问题的研究,不能简单套用西方理论,而必须结合我国证券市场环境及IPO发行审核制度,将制度因素作为内生变量来考察.     

Does culture influence IPO underpricing?

This paper examines how cultural differences influence cross-sectional variation in IPO underpricing across 39 countries. We conjecture that cultural difference across geographic boundaries will influence the acceptance of and the expectations for IPO underpricing. Cross-sectional differences in culture are measured using Hofstede's six cultural dimensions. Our analysis shows that high power distance and high long term orientation are significantly associated with higher IPO underpricing. We also show that underpricing is significantly lower in countries characterized by high uncertainty avoidance. When the model is expanded to include legal origin, market based and corporate governance variables, the three cultural factors remain significant. Our findings provide further evidence that culture impacts capital market returns. Overall, our finding that culture impacts IPO underpricing, suggests important implications for policy makers and investors.     

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.     

The influence of group affiliation and the underwriting process on emerging market IPOs: The case of the Philippines

In this paper we document underpricing and aftermarket returns of Philippine IPOs, discuss specific features of the Philippine IPO market, and investigate whether differential underpricing occurs due to certification considerations or potential conflicts of interest. We find that IPO underpricing is greater in cases where the offering firm is affiliated to a family business group, specifically when these affiliated firms use a foreign lead underwriter. Our results lead us to conclude that conflict of interest problems are recognized by market participants and that these conflicts of interest lead to differential underpricing.     

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.     

The Wealth Effect of Demutualization: Evidence From the U.S. Property-Liability and Life Insurance Industries

This study examines the wealth effect of demutualization initial public offerings (IPOs) by investigating underpricing and postconversion long‐run stock performance. Our results suggest that there is more “money left on the table” for demutualized insurers than for non‐demutualized insurers. We show that higher underpricing for demutualized firms can be explained by greater market demand, market sentiment, and the size of the offering. Further, contrary to previous research reporting an average underperformance of industrial IPOs, we show that demutualization IPOs outperform non‐IPO firms with comparable size and book‐to‐market ratios and non‐demutualized insurers. We present evidence that the outperformance in stock returns is mainly attributable to improvement in post‐demutualization operating performance and demand at the time of the IPOs. The combined results of underpricing and long‐term performance suggest that the wealth of policyholders who choose stock rather than cash or policy credits is not harmed by demutualization. Stockholders who purchase demutualized company shares either during or after the IPO have earned superior returns. Our findings are consistent with the efficiency improvement hypothesis.     

Overreaction in the thrift IPO aftermarket

We study the initial returns and long-run performance of a unique sample of thrifts that have recently converted from mutual to stock form. In addition to a full claim on all IPO proceeds, new investors in a converted thrift also receive a claim on all pre-conversion market value at no cost. Thus, the average firm in our sample has a degree of underpricing automatically built into its offer price. We find that after removing the large initial returns, cumulative excess returns for the firms in our sample are positive for 12 months after the IPO. Beginning in the second year after the IPO, the average firm in our sample undergoes a significant price correction that lasts approximately 18 months and which produces negative cumulative abnormal returns for up to 5 years post-issue. Differences in risk-adjusted returns also indicate negative long-run returns, with poor performance concentrated in the second and third years following the IPO. The return differences are most pronounced among the small thrifts in our sample, and are broadly consistent with investor overreaction at the time of the IPO that continues for 6–12 months before prices begin reverting back to fundamental value.     

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.     

Underwriter reputation and IPO underpricing: The role of institutional investors in the Chinese growth enterprise market

This paper investigates the effects of underwriter reputation on initial public offering (IPO) underpricing in the Chinese Growth Enterprise Market, in light of the conflicting evidence in the literature on IPO underpricing. Using data during the post global financial crisis period, we find that IPO firms with prestigious underwriters have lower market-adjusted initial returns on average. We further find that prestigious underwriters reduce IPO underpricing by minimizing the time gap between the offering and listing, choosing high-quality firms to underwrite, and reducing information asymmetry between issuers and investors. In the presence of institutional investors, however, we find that more underpricing occurs, as these investors tend to obtain access to IPO shares at a higher price discount via private placements. This new finding suggests that the institutional investors have a role to play in the case of high under-pricing, which partly gets corrected via underwriter reputation.     

Initial and Long-Run IPO Returns in Central and Eastern Europe

ABSTRACT

This article provides original evidence on IPO underpricing and long-run underperformance in Central and Eastern Europe (CEE) and compares results to the European Union’s developed capital markets from 2000 to 2009. Using both index-adjusted and CAPM-adjusted returns, we find significant underpricing that is significantly higher than underpricing of comparable IPOs in the European Union’s developed capital markets. We show that the CEE’s initial IPO returns also exhibit significantly higher volatility. In line with the asymmetric information theory, we indicate that smaller IPOs in the CEE region have greater underpricing than the larger IPOs. Contrary to the literature, we unambiguously confirm long-run underperformance toward the benchmarks. In some model specifications, we also find that IPO long-run underperformance in the CEE region is less present than in the European Union’s developed capital markets.