UNDERPRICING OF IPOS THAT FOLLOW PRIVATE PLACEMENT

In this study we examine the underpricing of initial public offerings (IPOs) by firms that have private placements of equity before their IPOs (PP IPO firms). We find that PP IPOs are associated with significantly less underpricing than their peers. Furthermore, PP IPOs are associated with lower underwriting spreads, more reputable underwriting syndicates, and greater postissue analyst coverage as compared to IPOs that are issued by their industry peers under similar market conditions. Consistent with the implications of the information asymmetry explanation for IPO underpricing, our findings suggest that companies could benefit by conveying their quality via successful pre‐IPO private placements that help reduce the cost of going public.     

IPO Underpricing and After-Market Liquidity

The underpricing of initial public offerings (IPOs) is generallyexplained with asymmetric information and risk. We complementthese traditional explanations with a new theory where investorsworry also about the after-market illiquidity that may resultfrom asymmetric information after the IPO. The less liquid theaftermarket is expected to be, and the less predictable itsliquidity, the larger will be the IPO underpricing. Our modelblends such liquidity concerns with adverse selection and riskas motives for underpricing. The model’s predictions aresupported by evidence for 337 British IPOs effected between1998 and 2000. Using various measures of liquidity, we findthat expected after-market liquidity and liquidity risk areimportant determinants of IPO underpricing.     

Issuers’ incentives and tests of Baron’s model of IPO underpricing

This paper reexamines the validity of Baron’s (J Financ 37:955–976, 1982) model of IPO underpricing, in which IPO underpricing is caused by asymmetric information between issuers and investment bankers. Muscarella and Vetsuypens (J Financ Econ 24:125–135, 1989) find that lead-manager IPOs are significantly more underpriced than non-self-marketed IPOs and conclude that their empirical results do not support Baron’s model. We compare self-marketed underwriters’ IPOs with non-self-marketed underwriters’ IPOs and with IPOs they lead. Our empirical results show that it is premature to reject Baron’s model of IPO underpricing when we take issuer incentives into account.     

Management of the IPO performance in Thailand

This research aims to explore the relationships between six major IPO elements in Thailand: underwriter reputation, ownership concentration, book-building, IPO allocation, the length of the lock up period, and investor interest and underpricing. The sample comprises 153 IPOs listed between 2001 and 2011. Cross-sectional analysis reveals that IPO allocation appears to be the strongest factor with a negative relation to underpricing. The length of the lock up period, issue size, industry, and hot issue market show significant and positive relationships with underpricing. Underwriter reputation is not associated with underpricing as the choice of underwriter is restricted by the Thai regulator's requirements. Book-building does not explain underpricing. Institutional investors play very limited roles in Thai IPOs. A small change in ownership concentration does not affect underpricing. Nevertheless, a longer lock up period can yield a higher initial return. Such a provision can restrain insider dealing.     

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.     

Uncertain Demand,Heterogeneous Expectations,and Unintentional IPO Underpricing

Distinguishing between intentional and unintentional incentives to underprice initial public offerings (IPOs), I develop sufficient conditions for the winners' curse postulated by Miller (1977) and implications for intertemporal changes in the magnitude of underpricing. Specifically, I show that unintentional underpricing (and occasional overpricing) of IPOs is a consequence of investors' heterogeneous expectations of the uncertain value of a stock when the supply is constrained and the underwriter's price discovery process only partially identifies aggregate demand. Moreover, an IPO that is oversubscribed in the premarket sale almost certainly will experience a short‐term price increase in the secondary market.     

An examination of IPO secondary market returns

IPO stock prices increased approximately 2.3% on the first day of secondary market trading over the period 1993 through 2003. While these aftermarket returns are accentuated during 1999 and 2000, they persist after the bubble burst and even increase as a percentage of total underpricing. We explore several non-mutually exclusive hypotheses to explain our findings including price support, laddering, retail sentiment, and information asymmetry. Our results are most consistent with the view that higher secondary market returns accrue to IPOs with more information asymmetries possibly due to price and aggregate demand uncertainty.     

Institutional Allocation in Initial Public Offerings: Empirical Evidence

We analyze institutional allocation in initial public offerings (IPOs) using a new data set of U.S. offerings between 1997 and 1998. We document a positive relationship between institutional allocation and day one IPO returns. This is partly explained by the practice of giving institutions more shares in IPOs with strong premarket demand, consistent with book-building theories. However, institutional allocation also contains private information about first-day IPO returns not reflected in premarket demand and other public information. Our evidence supports book-building theories of IPO underpricing, but suggests that institutional allocation in underpriced issues is in excess of that explained by book-building alone.     

Fixed price and book building methods in an exogenous environment: Evidence from Indonesia stock market

Book building has become a popular method of selling new shares. Although previous models suggest that book building is an efficient method for price discovery in initial public offering (IPO) issuance, empirical evidence provides mixed results. Previous empirical findings on IPO methods have been obtained from markets that allow issuers to choose the IPO method, and this setting is not free from endogeneity issues. We investigate the effect of IPO method (fixed price vs book building) in Indonesia, which is an emerging market that offers an exogenous setting for IPO methods. More specifically, Indonesia used the fixed price method for IPOs before October 2000 and used the book building method thereafter following the introduction of new IPO regulations. Using estimation methods that consider clustering phenomena, we find that book building yields larger underpricing and greater volatility than the fixed price method. Moreover, a positive relationship is observed between underpricing and aftermarket volatility for the book building method and book building IPOs underperform fixed price IPOs. No relationship was observed between underpricing and long-term performance for book building IPOs. Compared with previous models, our findings suggest that book building does not represent a quality IPO method and suffers from agency conflict; thus, this method needs improvement.     

Regulatory underpricing: Determinants of Chinese extreme IPO returns

The Chinese stock market with its unique institutions is rather different from western stock markets. The average underpricing of Chinese IPOs is 247%, the highest of any major world market. We model this extreme underpricing with a supply-demand analytical framework that captures critical institutional features of China's primary market, and then empirically test this model using a sample of 1377 IPOs listed on the Shanghai and Shenzhen Stock Exchanges between 1992 and 2004. We find that Chinese IPO underpricing is principally caused by government intervention with IPO pricing regulations and the control of IPO share supplies. Besides the regulatory underpricing, this paper also documents some specific investment risks of IPOs in China's stock market.     

Voluntary Disclosure of Management Earnings Forecasts in IPO Prospectuses

Asymmetric information and mechanisms for its resolution in the initial public offering (IPO) process are subjects of extensive research and debate. In this paper, we investigate the impact of one such mechanism, namely voluntary disclosure of management earnings forecasts by issuers of IPOs, as a means of reducing asymmetric information as well as ex ante uncertainty. Our focus is on the relative importance of this voluntary disclosure mechanism on both IPO underpricing and post‐issue return performance. Our results indicate that management earnings forecasts provide important and incremental information compared to other means of reducing asymmetric information, and these disclosures appear to improve the environment of IPO issuance. For example, our underpricing results show that firms that choose to provide forecasts leave 'less money on the table' with a lower degree of underpricing. In terms of post‐issue performance, firms whose forecasts turn out to be optimistic are penalized significantly relative to other forecasters and non‐forecasters.     

A Test of the Signaling Value of IPO Underpricing with REIT IPO-SEO Pairs

The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firms true worth such that good quality firms issue seasoned equity at favorable prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95 percent of net income as dividends, REIT managers are hard pressed to raise capital through seasoned equity. Consequently, the signaling link between IPOs and SEOs is critical for REITs. Consistent with the signaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricing results in larger joint amount of capital raised through an IPO-SEO pair, and (3) firms that underprice IPOs underprice SEOs as well. IPO underpricing does not mitigate the valuation loss associated with seasoned offerings, however.     

Innovations in financing: The impact of anchor investors in Indian IPOs

In 2009, the Securities Exchange Board of India allowed qualified institutional investors to anchor initial public offerings (IPOs) by participating in the issue at a price and allocation publicly disclosed preceding the issue. We study anchor investors (AIs) in Indian IPOs during 2009–2017. We find the share allotment and the number of AIs separately have significant impacts on valuation and underpricing; however, the net effect is nonsignificant. Further, AIs significantly influence other institutional investors' participation in the IPO and induce lower aftermarket volatility. Overall, our evidence suggests that AIs boost demand for and mitigate ex ante information uncertainty of IPOs.     

Underpricing,ownership dispersion,and aftermarket liquidity of IPO stocks

Booth and Chua [Booth J., Chua L. Ownership dispersion, costly information, and IPO underpricing. Journal of Financial Economics 1996; 41; 291–310] hypothesize that IPOs are underpriced to promote ownership dispersion, which in turn increases aftermarket liquidity of IPO stocks. We examine a sample of 1179 Nasdaq IPOs and find that underpricing is positively correlated with the number of non-block institutional shareholders after IPO but negatively correlated with the changes in the total number of shareholders. Firms with many non-block institutional shareholders tend to have high liquidity in the secondary market. These results provide support to Booth and Chua's hypothesis. Underpricing also has direct effects on secondary market liquidity after controlling for ownership structure and other factors.     

Underwriter Spread, Underwriter Reputation, and IPO Underpricing: A Simultaneous Equation Analysis

This paper studies the relationships between underwriter reputation, underwriter spread, and IPO underpricing. We consider the information content of underwriter spread and find that it conveys information pertinent to IPO quality. Because underwriter spread is endogenous, underpricing and underwriter spread are jointly determined in a simultaneous equation system. Also, we examine the IPO market for evidence of segmentation, and our results suggest some market segmentation. Underwriter spread impacts initial underpricing for a group of medium-reputation underwriters, while underpricing affects underwriter spread for groups of low- and high-reputation underwriters. Consequently, high-risk IPOs may not be priced the same way as low-risk IPOs. We attribute this finding to regulation, competition, and/or market segmentation.     

A Review of IPO Activity, Pricing, and Allocations

We review the theory and evidence on IPO activity: why firms go public, why they reward first–day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective is threefold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from nonrational and agency conflict explanations. We describe some promising such alternatives.     

IPO underpricing,signaling, and property returns

This paper investigates whether IPO signals reveal proprietary information about the prospects of an issuing firm’s underlying industry. By analyzing a sample of European property company (EPC) IPOs from 1997 to 2007, we take advantage of a heterogeneous set of industry performance measures, i.e., yields and total returns of direct property investments in various European property markets that can be clearly assigned to each individual IPO. The results reveal that the main signal of interest, underpricing, is in fact positively related to average property yields for a 12-month post-IPO period; a result that supports our assumption. Other signals, as proposed in previous research, do not appear to contain any information about the prospects of the IPO firm’s target property investment market. We also show that total returns seem to be a biased measure for direct property performance. Further tests for the signaling model’s preconditioned presence of information asymmetry among EPCs reveal that underpricing levels are a function of company-specific ex ante uncertainty proxies. In contrast, property-specific ex ante uncertainty proxies do not explain underpricing levels.     

Venture Capital Valuation,Partial Adjustment,and Underpricing: Behavioral Bias or Information Production?

Using a sample of venture capital (VC)‐backed initial public offerings (IPOs), we analyze the role played by perceived valuation changes on IPO underpricing. We find that perceived valuation change from the last pre‐IPO VC round to the IPO affects IPO underpricing in a nonlinear way. Further analysis indicates that information‐based theories, not behavioral biases, explain this nonlinearity. We also find that the previously documented partial adjustment effect and its nonlinear impact on IPO underpricing are related to the trajectory of the perceived valuation changes, which stands in stark contrast to prior evidence of the importance of behavioral biases.     

IPOs,clustering, indirect learning and filing independently

IPO underpricing has been attributed to valuation uncertainty, which can be at least partially resolved by the indirect learning associated with IPO clustering [Benveniste, L.M., Ljungqvist, A., Wilhelm, W.J., Yu, X.Y., 2003. Evidence of information spillovers in the production of investment banking services. Journal of Finance 58, 577–608]. We examine why firms might choose not to issue their IPOs contemporaneously with clusters of similar firms, forgoing opportunities to learn from their peers. We find that the willingness to file an IPO without the benefit of indirect learning from peer firm IPOs is directly related to insiders’ needs for portfolio diversification and the firm’s need to raise capital.     

Information content of IPO grading

In the year 2007, Indian capital market regulator-SEBI, introduced a unique certification mechanism for IPOs whereby all IPOs have to undergo mandatory quality grading by independent rating agencies. In this paper we argue that such objective, independent and exogenous certifying mechanism provides a better opportunity to test the well established certification hypothesis, especially in the context of emerging markets with institutional voids. Using a sample of 163 Indian IPOs we test the efficacy of IPO grading mechanism. We find, grading decreases IPO underpricing and positively influences demand of retail investors. Grading reduces secondary market risk and improves liquidity. However, grading does not affect long run performance of the IPOs. IPO grading successfully capture firm size, business group affiliation and firm’s quality of corporate governance. Our findings imply that, in emerging markets, regulator’s role to signal the quality of an IPO contributes towards the market welfare.