Earnings management of initial public offering firms: evidence from regulation changes in China

Discretionary current accruals of Chinese initial public offering (IPO) firms decreased after the abolition of fixed‐price offering systems that directly linked offering price to reported earnings. Results suggest IPO firms that decrease managerial ownership manage earnings upward during the fixed‐price offering period, but this relationship disappeared after the introduction of a book‐building system. We also find that bank debt is negatively related to discretionary current accruals during the fixed‐price offering period, but no relation exists for the book‐building period. Leverage has a significant positive relationship with earnings management. However, this finding is potentially attributable to nonoffering price objectives or endogeneity biases.     

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.     

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.        

Stock price effects and costs of secondary distributions

This study does not support the view that a large number of shares can be sold at the prevailing market price and at a small cost. A significant stock price decrease is observed at the initial announcement of secondary distributions. The price declines are greater for offerings by officers and directors and for larger offerings, but are significant for all types of sellers and for large and small offerings. There is no significant price decline at the offering when secondaries are announced in advance. Underwriting and other selling costs are substantial and are positively related to relative offering size.     

国人通信

2006年3月30日，深圳国人通信公司在纳斯达克上市，收报于19美元，比18美元的IPO价格上涨了一美元。[编者按]     

Debt Issue Costs and Issue Characteristics in the Market for U.S. Dollar Denominated International Bonds

This paper analyzes the issue costs and initial pricing of bonds in the international market. In particular, we investigate the determinants of three components of issue costs: underwriter fee, underwriter spread (the difference between the offering price and the guaranteed price to the issuer), and underpricing (the difference between the market price and the offering price). Total underwriter compensation increases with the bonds' credit risk and maturity, but it is insignificantly related to issue size. Interestingly, underwriters appear to price some issue characteristics directly (by adjusting the fee) and other characteristics indirectly (by setting the guaranteed price). The two compensation components (fee and spread) are negatively related to each other. We provide evidence that this trade-off is consistent with income tax considerations, as well as with two-tier pricing by underwriters. We find no evidence of underpricing.     

The over/underpricing of initial public offerings

This article shows that lawsuit avoidance motivation can lead entrepreneurs to overprice, as well as underprice, initial public offerings of equity. The article simplifies the lawsuit avoidance argument by addressing the entrepreneur's acceptable probability of lawsuit predicated on the loss of reputation capital, in lieu of the explicit offering revenue/litigation cost trade-off previously treated in the literature. The model yields offering price regimes which include rational cases of overpricing and correct pricing, as well as underpricing, and comparative statics results for the relationship of the optimal offering price with project size, project risk, investors' litigiousness, and the entrepreneur's acceptable probability of lawsuit. The article argues that existing empirical evidence previously used to refute the lawsuit avoidance hypothesis supports the hypothesis in the context of the model.     

Incentives to underprice

In an initial public offering, the choices made by issuers, such as the offer price, might not appear to be wealth maximizing. In this article, we argue that the choices are strategic. Based on the model developed by Barry (1989), we show that the average change in the issuer's wealth (4.52 per cent) is lower than the average loss implied by underpricing (12.09 per cent). Our results support the notion that the choices issuers make at the offering generate a compensatory benefit in the aftermarket. That the issuer may well not suffer a net wealth loss from the offering is in accordance with continued initial public offering activity.     

Assets in Place, Growth Opportunities, and IPO Returns

We consider a simple model positing that initial public offering price is equal to the present value of an entity's assets in place and growth opportunities. The model predicts that initial return is positively related to both the size and risk of growth opportunities. Consistent with this prediction, we find initial return to be positively related to both the fraction of the offer price that is accounted for by the present value of growth opportunities and various proxies of issue uncertainty. We also find that IPO investors equate one dollar of growth opportunities to approximately three quarters of tangible assets.     

Underpricing and Firm Quality in Initial Public Offerings: Evidence from Singapore

Firms seeking initial public listings on the Stock Exchange of Singapore can choose between offering their shares at a fixed price or selling them in two tranches: the first tranche is offered at a fixed price while the issue price of the second tranche is determined via a tender system. Consistent with the existing signalling literature, tendering IPO firms underprice their fixed price tranche more than non-tendering IPO firms. The underpricing in the fixed tranche is recouped through higher proceeds from the tender tranche. Our evidence suggests that IPO firms use the tender option to signal superior firm quality.     

RULE CHANGES AND UNCERTAINTY IN DISCRIMINATORY AND UNIFORM PRICE AUCTIONS

The auction literature indicates that uncertainty about the value of auctioned goods increases underpricing in discriminatory price auctions. Such uncertainty has a smaller effect on uniform price auctions because the pricing rule aggregates bidders' information. We find that uncertainty resulting from inexperience with an auction mechanism has similar effects. Using initial public offering (IPO) data from Japan and Israel, we find that average underpricing increases temporarily in Japan's discriminatory price auctions after changes in the auction rules, which suggests that bidders reduce their bids in response to uncertainty. Underpricing in Israel's uniform price auctions is not affected by rule changes.     

Excess initial returns in IPOs

The empirical evidence on initial returns in IPOs reveals average overpricing as well as underpricing, depending on the type of security offered for sale. Consistent with this evidence, the present paper develops a model in which an IPO may be overpriced in equilibrium relative to its expected (or average) aftermarket price. Overpricing disappears, however, once the offer price is compared to a ‘float-weighted’ expectation, where the weights are given by the extent to which the number of securities that are floated in the offering (at the posted price) is positively related to the demand for allocations. Empirically, the model implies that equally-weighted returns underestimate initial returns in IPOs, and hence that inferences based on equally-weighted returns may be misleading.     

An Experimental Study of Bond Market Pricing

An important feature of bond markets is the relationship between the initial public offering (IPO) price and the probability that the issuer defaults. On the one hand, the default probability affects the IPO price; on the other hand, the IPO price affects the default probability. It is a priori unclear whether agents can competitively price such assets. Our paper is the first to explore this question. To do so, we use laboratory experiments. We develop two flexible bond market models that are easily implemented in the laboratory. We find that subjects learn to price the bonds well after only a few repetitions.     

Risk, Reputation, and IPO Price Support

Immediately following an initial public offering, underwriters often repurchase shares of poorly performing offerings in an apparent attempt to stabilize the price. Using proprietary Nasdaq data, I study the price effects and determinants of price support. Some of the key findings are (1) Stabilization is substantial, inducing price rigidity at and below the offer price; (2) I find no evidence that stocks with larger information asymmetries are stabilized more strongly; (3) Larger underwriters stabilize more, perhaps to protect their reputations with investors; and (4) Investment banks with retail brokerage operations stabilize much more than other banks, inconsistent with the view that stabilization benefits primarily institutional investors.     

A theory of the transition to secondary market trading of IPOs

We develop a model in which investment banks and institutional investors collaborate in smoothing an initial public offering's (IPOs) transition to secondary market trading. Their intervention promotes welfare under the assumption that significant new information arrives in the market in the immediate aftermath of the IPO. Under this assumption, it is optimal to stage the offering and suboptimal to commit to selling shares at a uniform price. The optimal strategy yields an economic rationale for secondary market price stabilization for IPOs carried out via a well-coordinated network of repeat institutional investors.     

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.     

Valuation of Internet Stocks—An IPO Perspective

We empirically investigate valuations of Internet firms at various stages of the initial public offering (IPO) from two perspectives. First, we examine the association between the valuation of Internet IPOs and a set of financial and nonfinancial variables, which prior anecdotal or empirical evidence suggests may serve as value drivers. Second, we document differences in IPO valuations between Internet and non-Internet firms as well as across different stages in the IPO process—i.e., initial prospectus price, final offer price, and first trading day price—within each set of firms. Our primary two conclusions are as follows. First, there are noticeable differences between valuations of Internet and non-Internet firms, especially at the prospectus and final IPO stage. Specifically, the valuation of non-Internet firms generally follows the conventional wisdom regarding valuation: positive earnings and cash flows are priced, while negative earnings and negative cash flows are not. The valuation of Internet firms, however, departs from conventional wisdom, with earnings not being priced, and negative cash flows being priced perhaps because they are viewed as investments. This difference between the two classes of firms may be expected, given the age and unique nature of the Internet industry. Second, there are significant differences between the initial valuation of firms at the prospectus and IPO stage and their valuation by the stock market at the end of the first trading day. For non-Internet firms, the difference is largely ascribed to the relative offering size. For Internet firms, however, the differences are with respect to positive cash flows, sales growth, R&D, and high-risk warnings, in addition to the relative offering size.     

Corporate Dividends and Seasoned Equity Issues: An Empirical Investigation

This paper investigates whether managers rely on dividends to obtain a higher price in a stock offering and whether the stock price reaction to dividend and offering announcements justifies such a coordination. The evidence does not support either conjecture. Issuing firms are not more likely to pay or increase dividends than nonissuing forms. Moreover, there is little evidence that firms time stock offering announcements right after dividend declarations to benefit from the attendant information disclosure. The analysis of dividend and stock offering announcement effects suggests few if any benefits from linking dividend and stock offering announcements.     

合资承销商影响新股破发率的实证研究

新股破发是目前中国股市目前面临的一个重要现象。本文基于2004年至2010年上市的A股IPO,研究合资承销商对新股破发率的影响。研究发现,合资承销商所承销的新股破发率显著低于本土承销商。合资承销商的低破发率主要归功于更加有效且符合市场预期的一级市场发行定价能力,其表现为合资承销商发行的股票的短期市场价格相对发行价的偏离程度显著低于本土承销商发行的股票。另外,我们还发现合资承销商采取了一定的托市行为,该行为也减小了短期内新股跌破发行价的概率。本文的发现从新股发行的角度提供了开放金融市场对我国资本市场影响的新现象。     

Issuer surplus and the partial adjustment of IPO prices to public information

This study develops a model in which rational issuers maximize the expected surplus from going public by choosing an offer price that weighs the benefit of higher proceeds if the offer is completed against the cost of foregone surplus if the offer fails. Increases in the market valuation of comparable firms during the waiting period imply higher surplus associated with going public; issuers respond with a partial revision in the offer price to elevate the probability of completion. The model offers insights into many facts associated with initial public offering pricing, including partial adjustment to market returns, the inverse relation between withdrawal and market returns, the asymmetric price adjustment to up versus down market returns, hot-issue markets, and unconditional underpricing.