Accounting conservatism and IPO underpricing: China evidence

This study examines how accounting conservatism impacts underpricing of initial public offerings (IPOs) in the Chinese stock market. In addition, we investigate how information asymmetry affects the association of accounting conservatism with IPO underpricing. Based on regression analysis of 674 A-shares companies that went public through IPOs at both Shanghai and Shenzhen Stock Exchanges in China during 2001–2009, we find that (1) accounting conservatism is negatively associated with the magnitude of IPO underpricing; and (2) the relationship between accounting conservatism and IPO underpricing is more pronounced when information asymmetry is high. The findings should shed a light on what drives IPO underpricing and how it could be affected by accounting conservatism in an emerging economy.     

Underwriter reputation and underpricing: evidence from the Australian IPO market

Dimovski and Brooks (J Intern Financ Mark Inst Money 14:267–280, 2004b) examined 358 Australian industrial and mining company initial public offerings (IPOs) from 1994 to 1999 to report that more money was left on the table by IPOs that engaged underwriters than those that did not engage underwriters. Loughran and Ritter (Autumn 5–37, 2004) suggested that the negative relation between underwriter reputation and underpricing has reversed in the 1990s with U.S. IPOs. The main purpose of this paper is to study the relationship between underwriter reputation and underpricing in terms of Australian IPO data. In this paper, we use 380 Australian industrial company IPOs from 1994 to 2004 to perform the empirical study. Our results suggest that more prestigious underwriters are associated with a higher level of underpricing. Other variables that are found to be significant in explaining the level of IPO underpricing are market sentiment, share options, total capital raised and underwriter options.     

全球IPO市场再度上演“中国年”

A股市场:悬崖前逆转,未改“长牛”格局 2015年上半年,伴随上市审核提速以及强劲的资本市场带动上市活动,推动了深交所上市宗数位列全球第一,上交所筹资额位列全球第二.7月初,因市场出现大幅波动,中国证监会再度暂停IPO,并推出一系列维稳措施.11月市场企稳,证监会宣布完善新股发行制度,并重启新股发行.尽管2015年的股市起伏跌荡,但从全年度总体趋势上来讲,整体还是呈现了一个向上的格局.     

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.     

Bank efficiency: The role of bank strategy and local market conditions

In this paper we focus on the assumption of a common efficient frontier when performing an efficiency study for the banking sector. The fact that environmental factors that are not appropriately controlled may easily bias efficiency estimates. First, we estimate a common cost and profit frontier. In this first stage, as an innovation to the literature, we use exogenously computed input prices rather than the normally used endogenous input prices. Second, we regress the estimated inefficiencies on a set of a bank’s strategic choices, local banking market variables, and local (regional) macro variables. For the analysis, we use a unique dataset of 401 largely independent cooperative local banks in the Netherlands for the years 1998 and 1999. Our results show that the use of exogenous input prices rather than endogenous input prices is particularly important for the cost frontier as the spread in cost inefficiencies becomes larger and more plausible. Our second stage results suggest that most of the estimated inefficiency indeed is managerial (X-) inefficiency. Environmental factors do play a role, but only to a limited extent.     

IPO market timing. The evidence of the disposition effect among corporate managers

Until now, IPO market timing has been mostly associated with a varying number of IPOs in certain periods of “hot” and “cold” issue markets. We would like to offer a different perspective. We focus on a speed of the IPO process, after the decision to go public was actually made. Our hypothesis is that in “hot market” managers will tend to minimize the time necessary to go public in order to take advantage of high valuations as quickly as possible. On the contrary, if the firm is not ready with the IPO on time and in the meantime the market falls during the going-public process, managers will tend to delay the IPO hoping that the good market conditions will come back soon. We argue that such a behavior might be attributed to the disposition effect among firms' managers.We find a statistically significant negative correlation between the market return and the speed of the IPO process. The absolute correlation coefficient is higher when the market return is calculated 90 days prior to the Approval Date of the prospectus than when it is calculated 90 days after the Approval Date. Hence, a vast part of the market influence on the speed of the offering process has its origin at the time when offering is formally not possible yet. External factors occurring after the Approval Date seem to be less important than the managerial decision influenced by observation of the market situation prior to the Approval Date.We also find that for firms débuting faster than the median of our sample, the average market return in the period between the IPO date and the median is positive. On the other hand, in the group of slower firms, the average market return in the period between the median and the IPO date is negative. There is an analogy between firms – débuting too fast in bullish market and too slow in bearish market, and investors – selling winning stocks too quickly and keeping falling stocks for too long in their portfolios. Both managers and investors seem to be biased by the S-shape utility function, as predicted by the prospect theory of Kahnemann and Tversky (1979).     

Stock market restrictions and corporate social responsibility: Evidence from IPO suspension in China

Improving corporate social responsibility (CSR) requires not only the efforts of firms themselves but also the support of the appropriate institutional environment. This paper assesses whether access to the stock market can promote firms’ CSR. Using China’s suspension of IPOs in 2012–2014, we find that firms affected by the suspension show lower CSR in their listing year. The later listing after the suspension ends, the greater reduction in CSR. Moreover, the effect of the IPO suspension is more serious for firms with financial constraints than for non-financially constrained firms. Furthermore, we show that the IPO suspension has an adverse impact on firms’ liquidity and profitability. When this suspension ends, firms’ CSR activities recover within 1–2 years. Overall, our conclusion enriches the literature on the factors influencing CSR and provides firm-level evidence of the adverse impact of an IPO suspension.     

Market conditions and the optimal IPO allocation mechanism in China

This paper investigates the impact of market conditions of market return and volatility on choosing an IPO mechanism, using data of 942 IPOs on either Shanghai or Shenzhen stock exchanges of China from 1994 to 2003. We find, on average, the issuers are more likely to have their IPOs offering and listing during times of high market return and low market volatility. The fixed price procedure of the secondary market proportional offering is optimal in minimising the underpricing and cross-sectional variation of the first day returns. The bookbuilding procedure is optimal in counteracting adverse conditions created by low market profitability, high market volatility and uncertainty induced by the time ‘gap’ from offering to listing. By comparing the advantages between the secondary market proportional offering and bookbuilding procedures, the latter is preferred.     

IPO waves, product market competition, and the going public decision: Theory and evidence

We develop a new rationale for initial public offering (IPO) waves based on product market considerations. Two firms, with differing productivity levels, compete in an industry with a significant probability of a positive productivity shock. Going public, though costly, not only allows a firm to raise external capital cheaply, but also enables it to grab market share from its private competitors. We solve for the decision of each firm to go public versus remain private, and the optimal timing of going public. In equilibrium, even firms with sufficient internal capital to fund their new investment may go public, driven by the possibility of their product market competitors going public. IPO waves may arise in equilibrium even in industries which do not experience a productivity shock. Our model predicts that firms going public during an IPO wave will have lower productivity and post-IPO profitability but larger cash holdings than those going public off the wave; it makes similar predictions for firms going public later versus earlier in an IPO wave. We empirically test and find support for these predictions.     

Cycles in the IPO market

We develop a model in which time-varying real investment opportunities lead to time-varying adverse selection in the market for IPOs. The model is consistent with several stylized facts known about the IPO market: economic expansions are associated with a dramatic increase in the number of firms going public, which is in turn positively correlated with underpricing. Adverse selection is procyclical in the sense that dispersion in unobservable quality across firms should be more pronounced during booms. Taking the premise that uncertainty is resolved (and thus private information revealed) over time, we test this hypothesis by looking at long-run abnormal returns and delisting rates. Consistent with the model, we find (a) greater cross-sectional return variance, and (b) higher incidence of delisting for hot-market IPOs.     

The world cup in football and the US IPO market

We document that US IPOs that take place during a world cup in football (soccer), compared to IPOs before or after, exhibit 9% lower underpricing and 6% lower price adjustment. IPOs during world cups receive less attention from foreign investors and exhibit significantly higher long-run returns. Our results are robust to excluding the IPO bubble period of 1999 and 2000, including only listings during summer months, controlling for overall market sentiment and market conditions, and to using various matched samples of non-world cup IPOs. Firm characteristics of world cup IPOs are indistinguishable from those of non-world cup IPOs, suggesting that selection is not driving the results. Consistent with prior studies showing that world cups affect market sentiment, we show that this extends to US IPOs, where lower sentiment, driven by foreign investors, leads to reduced investor attention and lower valuations.     

Markowitz efficiency and size effect: evidence from the UK stock market

Academics and practitioners have frequently debated the relationship between market capitalization and expected return. We apply the Markowitz efficient frontier approach to develop a portfolio performance measure that compares the return of a portfolio to its optimal return, using data from the UK stock market over the period 1985–2012. Our results show that there is a negative relationship between portfolio size and portfolio return during the period under study. When comparing actual portfolio return with achievable return for the same level of risk, we find that as the portfolio size expands, underperformance of the portfolio increases, i.e. the larger the portfolio size, the greater the underperformance. This indicates that Markowitz efficiency is difficult to achieve, particularly in large portfolios. Changing model parameters leads to alternative efficient frontiers that impact upon the measurement of performance. However, the use of alternative efficient frontiers does not affect our result of the size effect on the relative performance of portfolios. Our study shows that the size effect is present over the full period. Our findings also suggest that the excess returns found in small portfolios are likely to be associated with higher levels of diversifiable risk in comparison with larger portfolios. Furthermore, in contrast to other studies, we find no evidence to support the size reversal effect in the data.     

Financial crisis and stock market efficiency: Empirical evidence from Asian countries

This paper empirically investigates the effects of the 1997 financial crisis on the efficiency of eight Asian stock markets, applying the rolling bicorrelation test statistics for the three sub-periods of pre-crisis, crisis, and post-crisis. On a country-by-country basis, the results demonstrate that the crisis adversely affected the efficiency of most Asian stock markets, with Hong Kong being the hardest hit, followed by the Philippines, Malaysia, Singapore, Thailand and Korea. However, most of these markets recovered in the post-crisis period in terms of improved market efficiency. Given that the evidence of nonlinear serial dependencies indicates equilibrium deviation resulted from external shocks, the present findings of higher inefficiency during the crisis are not surprising as in the chaotic financial environment at that time, investors would overreact not only to local news, but also to news originating in the other markets, especially when the news events were adverse.     

The IPO market as a screening device and the going public decision: evidence from acquisitions of privately and publicly held firms

The main purpose of this paper is using a unique data set from IPO filings to study the IPO market as a screening device and the going public decision. We find that private firms that are less likely to have the option to access public equity markets receive 54 cents for each dollar they expected to raise in an IPO, whereas firms that are more likely to have the option to go public but sell privately sell at $1.11 for each dollar they expected to receive at the IPO. This result suggests that the lower valuation for firms sold in private markets compared to firms sold in public markets can be at least partially explained by the lower relative bargaining power of private firms. However, owners that took their firms public before selling received, on average, 40% larger payoffs than owners that had the option to go public but decided to sell privately. The results in this study indicate that these differences in valuation are not fully explained by existing theoretical models on the decision to sell privately or in two stages.     

IPO activity and information in secondary market prices

This paper explores the link between IPO underpricing and financial markets. In my model the IPO is a mean for a capital constrained initial investor to exit and thereby to raise funds for a new investment opportunity. This investor is privately informed vis-a-vis outside investors about the profitability of the new opportunity and the quality of the firm to be offered in the IPO. He can then use the offer price and the fraction of shares sold as signals of his private information. The model shows that underpricing is not only linked to firm’s characteristics, i.e. firm value, but to elements external to the firm, i.e. new investment profitability and financial markets characteristics. In particular higher market efficiency reduces the cost of listing. This results in lower underpricing and the listing of more valuable firm. Similarly, a higher lower bound of the new investment’s profitability reduces the information asymmetry and hence reduces underpricing and widens the range of firms listed.     

Politicians and the IPO decision: The impact of impending political promotions on IPO activity in China

This paper shows that incentives created by the impending turnover of local politicians can accelerate the pace of initial public offering (IPO) activity in certain politicized environments. Focusing on China, we exploit a research setting where politicians are rewarded for capital market development, firms rely on political connections for access to capital, rent-seeking behavior is rampant, and the objectives of the state might not be to maximize capital market efficiency. We find that the rate of exchange eligible firms engaging in an IPO temporarily increases in advance of impending political promotion events. This effect holds for both state-owned and non-state-owned entities. For state-owned firms, the effect is strongest in those provinces where the politicians are more likely to be rewarded for market development activity. For non-state-owned firms, the temporary increase in IPO activity appears to be (rationally) opportunistic in nature, with the effect stronger around events more likely to disrupt the firms' political connections. Promotion period IPOs underperform non-promotion period IPOs in terms of both future financial performance and long-run stock returns, have controlling shareholders who retain a larger fraction of the company, and are more likely to divert proceeds away from their intended use after the offering.     

The extent of informational efficiency in the credit default swap market: evidence from post-earnings announcement returns

Under semi-strong market efficiency future returns are unpredictable from previously released information. We test the degree of semi-strong form market efficiency in the credit default swap (CDS) market by examining the relationship between subsequent CDS returns and previously announced quarterly earnings surprises and quarterly accruals, both of which have been the source of stock market anomalies. We conduct our analysis over three time periods: (1) before the credit crisis that spanned from July 2007 to June 2009, (2) during the credit crisis, and (3) after the credit crisis. Both before and after the credit crisis, the CDS market was efficient, exhibiting no systematic relation between subsequent CDS returns and previously announced accounting information. During the credit crisis, however, we find that both quarterly earnings surprises and quarterly accruals are associated with systematic patterns in subsequent CDS returns that are consistent with underreaction to both measures. In the latter stages of the crisis, the pattern reverses, consistent with the CDS market overreacting to both measures although the overreaction is short-lived. Collectively, our results indicate that the CDS market is efficient during periods of relative economic stability but call into question its efficiency during less stable economic periods.     

Managerial characteristics and stock market investment: evidence from China

We examine the effect of managerial characteristics on investment in the stock market by listed firms in China. Our empirical findings suggest that higher levels of cash‐based compensation may increase both the propensity of investing in the stock market and the total amount of investment. On the other hand, managerial holdings discourage managers from investing in stock markets and also lead to a decrease in the amount of investment. This study sheds light on managerial risk‐taking incentives. Moreover, this study fills the gap in the literature by providing evidence for the determinants of listed firms’ stock market investment.