Implications of Internal Funds Surplus for Determining Agency Spending of SEO Proceeds and Timing Incentives

According to the pecking order theory, firms with potential investment projects should raise external capital if and only if sufficient internal funds are not available. The theory can be violated if equity issuers are motivated by market timing and increasing funds for insiders’ benefits, indicating that firms may already have internal funds surplus without including external funds, but still issue equity. By controlling for future funds needs, the analyses show that issuers that engage in market timing and spend the SEO proceeds on value-destroying projects are strongly associated with their internal funds surplus. Moreover, SEO announcement returns are lower for issuers with internal funds surplus. This pattern strongly supports the predictive ability of internal funds surplus to detect the need for external capital and ultimately to determine timing incentives and agency spending of SEO proceeds.     

Issuer Operating Performance and IPO Price Formation

We study the relation between issuer operating performance and initial public offering (IPO) price formation from the initial price range to the offer price to the closing price on the first trading day. For a post‐bubble sample of 2001–2013 IPOs, we find that pre‐IPO net income and, in particular, operating cash flow are strongly, positively associated with the revision from the mid‐point of the initial price range to the offer price and that the “partial adjustment phenomenon” concentrates among issuers with the strongest operating performance. As for why publicly observable information helps predict changes in valuation from when the initial price range is set to when the offer price is set, our findings suggest that strong‐performing issuers, especially those offering small slices of ownership, have lower bargaining incentives and are susceptible to the underwriter(s) low‐balling the price range. Overall, our results suggest an important role for accounting information in understanding the pricing of book‐built IPOs and are consistent with the presence of agency problems between issuers and underwriters.        

Public Information, IPO Price Formation, and Long-Run Returns: Japanese Evidence

The price formation process of JASDAQ IPOs is more transparent than in the United States. The transparency facilitates analysis of important issues in the IPO literature—why offer prices only partially adjust to public information and adjust more fully to negative information, and why adjustments are related to initial returns. The evidence indicates that early price information conveys the underwriter's commitment to compensate investors for acquiring and/or disclosing information. Offer prices reflect pre-IPO market values of public companies and implicit agreements between underwriters and issuers that originate well before the offering. Underadjustment of offer prices is substantially reversed in the aftermarket.     

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.     

A Reexamination of the Costs of Firm Commitment and Best Efforts IPOs

Ritter [14] documents that best efforts IPOs are, on average, more costly to issue than firm commitment IPOs. This paper explains the phenomenon. Two component costs of going public are analyzed: underpricing and underwriter compensation. The model, based on a disagreement about firm value between underwriters and issuers, shows that underpricing is higher for firms using best efforts contracts as these firms, on average, are more speculative. Underwriter compensation is hypothesized to be higher for firms using best efforts contracts because of the high costs of market making for these firms in the aftermarket and the high distribution costs associated with the high risk of a failed offer. Empirical tests strongly support the propositions.     

The New Issues Puzzle

Companies issuing stock during 1970 to 1990, whether an initial public offering or a seasoned equity offering, have been poor long-run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a seasoned equity offer. Book-to-market effects account for only a modest portion of the low returns. An investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date.     

Does IPO Pricing Reflect Public Information? New Insights from Equity Carve‐Outs

We examine the efficiency of initial public offering (IPO) pricing using a sample of over 300 equity carve‐outs from 1985 to 2009. The partial adjustment theory posits that the initial return of IPOs is predictable based on private information, but public information is fully incorporated. Prospect theory is consistent with both private and public information not being fully incorporated in the offer price. Our analysis confirms that both price update and initial return of carve‐out IPOs can be predicted based on the parent firm's returns during the prepricing and preissuing periods. Further, postissue ownership of the parent firm is associated with significantly higher price update and initial return, while IPOs where the majority of the proceeds are paid out register lower initial return. The size of the subsidiary and relative size of the offering are also significantly related to price update and initial return. These findings are consistent with prospect theory.     

The short-term timing of initial public offerings

This paper examines the effect of stock market conditions on the waiting time of initial public offering (IPO) candidates, from the date firms file a registration statement with the Securities and Exchange Commission (SEC) to the effective IPO date. I find that issuers are going public faster when time-varying stock market valuations are high, and when time-varying market returns and time-varying market volatility are low. The volatility effect is not driven by regulatory delays consecutive to changes in the terms of the offers during the IPO process. Taken together, these results indicate that firms use a short-term market timing strategy when deciding the right time to go public and are consistent with a real option interpretation of IPO timing.     

Asymmetric Price and Volatility Adjustments in Emerging Asian Stock Markets

This paper tests the hypothesis that stock returns in emerging stock markets adjust asymmetrically to past information. The evidence suggests that both the conditional mean and the conditional variance respond asymmetrically to past information. In agreement with studies dealing with developed stock markets, the conditional variance is an asymmetrical function of past innovations, rising proportionately more during market declines. More importantly, the conditional mean is also an asymmetrical function of past returns. Specifically, positive past returns are more persistent than negative past returns of an equal magnitude. This behaviour is consistent with an asymmetric partial adjustment price model where news suggesting overpricing (negative returns) are incorporated faster into current prices than news suggesting underpricing (positive returns). Furthermore, the asymmetric adjustment of prices to past information could be partially responsible for the asymmetries in the conditional variance if the degree of adjustment and the level of volatility are positively related.     

The partial adjustment of IPO prices to public information and issuing methods in Taiwan

Using 1997 to 2009 exchange-listed data, we examine the treatment of public information by underwriters throughout the entire initial public offering (IPO) price-setting process in Taiwan. We find that regardless of which mechanism (fixed-price, auctions, or book-building) an issuer has chosen, the partial adjustment of the IPO offer prices to public information is evident in our study. Although both fixed-price and book-built issues show a modest but statistically significant relationship between market returns and the level of initial returns, we find economically meaningful effects for both issuing methods. Our findings also demonstrate that auctioned IPOs exhibit strong evidence of partial adjustment to market returns. That is to say, the estimated effect is statistically and economically significant. Therefore, we attempt to provide rational explanations for such phenomena.     

The Going-Public Decision and the Development of Financial Markets

This paper explores the linkages between stock price efficiency, the choice between private and public financing, and the development of capital markets in emerging economies. Generally, the advantage of public financing is high if costly information is diverse and cheap to acquire, and if investors receive valuable information without cost. The value of public firms generally depends on public market size, which implies that there can be a positive externality associated with going public, so that an inferior equilibrium can exist where too few firms go public. The model is consistent with empirical observations on financial market development.     

A股与H股市场的差异与互动

本文选择了28家既在香港发行H股,又在内地发行A股的上市公司作为样本,研究分割市场之间的差异性和互动关系.通过对比相同上市公司在两个市场上的收益性和波动性差异,本文发现:两个市场在年报公告、中报公告、季报公告以及预告事件下获得的超额收益具有显著差异,而在分红通过公告事件下未产生显著差异;同时,除了分红通过公告(旧信息)事件未引起市场产生明显的波动以外,其余事件都对两个市场产生了显著的波动性影响.另外,我们也发现"H股引起A股变化"的可能性要大于"A股引起H股变化"的可能性.     

The Performance of Long-run Stock Returns Following Issues of Public and Private Debt

This study uses a balance sheet-based method to identify both public and private debt issues. This feature is important because there have been no studies of the information content of private debt issues, while private debt is substantially more prevalent than public debt. We find no abnormal returns following straight debt issues. However, convertible debt issuers under-perform the market on the order of 50 to 70 percent in the following five years. In pursuit of explanations, we find that convertible debt issues signal a deterioration of future profitability, which accounts for at least part of the stock price underperformance.     

Global trends in IPO methods: Book building versus auctions with endogenous entry

The U.S. book-building method has become increasingly popular for initial public offerings (IPOs) worldwide over the last decade, whereas sealed-bid IPO auctions have been abandoned in nearly all of the many countries in which they have been tried. I model book building, discriminatory auctions, and uniform price auctions in an environment in which the number of investors and the accuracy of investors’ information are endogenous. Book building lets underwriters manage investor access to shares, allowing them to reduce risk for both issuers and investors and to control spending on information acquisition, thereby limiting either underpricing or aftermarket volatility. Because more control and less risk are beneficial to all issuers, the advantages of book building's allocational flexibility could explain why global patterns of issuer choice are surprisingly consistent. My models also predict that offerings with higher expected underpricing have lower expected aftermarket volatility; that an auction open to large numbers of potential bidders is vulnerable to inaccurate pricing and to fluctuations in the number of bidders; and that both book-built and auctioned IPOs will exhibit partial adjustment to both private and public information.     

The oversight role of regulators: evidence from SEC comment letters in the IPO process

This study investigates how regulatory oversight affects the price formation of initial public offerings (IPOs). We provide evidence on the oversight role of the US Securities and Exchange Commission (SEC) by examining the effects of comment letters issued by the SEC in the process through which companies are initially listed. We find that IPO issuers reduce their offer price if they receive comment letters. The reduction in price from the IPO filing date to the final issue date is greater when the IPO firm has more correspondence with the SEC. The pricing impact of SEC comment letters is more pronounced for IPO issuers with greater hyping incentives. Moreover, we find that IPO firms that receive more comment letters have similar levels of underpricing and outperform over the long run after the issue date, compared with IPOs with fewer comment letters.     

Option implied volatilities and the cost of issuing equity

The structure of a firm-commitment Seasoned Equity Offering (SEO) resembles a put-option underwritten by an investment bank syndicate (Smith, 1977). Employing implied volatilities from issuers’ stock options as a direct forward-looking measure, this paper examines the impact of expected price risk around SEO issue dates on the direct cost of issuing equity. Using a comprehensive sample of 1208 SEOs between 1996 and 2009, we find issuers with higher option implied volatilities raise less external equity capital and pay higher investment bank fees in the stock market, ceteris paribus. The effect of implied volatility on the investment bank fees is stronger for larger issuers with lower pre-SEO abnormal realized stock volatilities, and for SEOs with higher expected price pressures around issue dates. These relationships are robust to adjustments for correlations among control variables, sample selection bias and also simultaneous determination of offer size and SEO fees.     

Equity issues when in distress

We investigate the role of financial distress in the seasoned equity market. We find that distressed firms comprise about 40% of SEOs and these distressed issuers have worse abnormal announcement returns than non‐distressed issuers. Stock return volatility is an important determinant for announcement returns for non‐distressed SEO issuers but not for distressed SEO issuers. Signals of firm quality are associated with better announcement returns, larger issues, increased investment, improved operating performance, and lower likelihood of delisting for distressed SEO firms as compared to non‐distressed firms. Our findings suggest equity finance is valuable for financially distressed firms with strong growth prospects.     

Stock Returns and Operating Performance of Securities Issuers

We examine long‐run stock returns and operating performance around firms’ offerings of common stock, convertible debt, and straight debt from 1985 to 1990. We find that pre‐issue abnormal returns are positive and significant for stock issuers, but not for convertible and straight debt issuers. The post‐issue mean returns show that common stock and convertible debt issuers experience underperformance during the post‐issue periods, but straight debt issuers do not. Consistent with these results, common stock issuers experience the best pre‐issue operating performance among all three types of issuers, and operating performance declines during the post‐issue periods for common stock and convertible debt issuers. Using a new approach in linear model estimations to correct heteroskedasticity and to adjust for finite sample, we find a positive relation between post‐issue operating performance and issue‐period stock price reactions. The results suggest that future operating performance is anticipated at the issue and that securities issues provide information on issuers’ future performance.     

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.     

Pseudo Market Timing and the Long-Run Underperformance of IPOs

Numerous studies document long-run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed ex-post in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. Ex-post , issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when ex-ante expected abnormal returns are zero, median ex-post underperformance for equity issuers will be significantly negative in event-time. Using calendar-time returns solves the problem.