Audit quality, auditor compensation and initial public offering underpricing

We jointly study the impact of audit quality on auditor compensation and initial public offering (IPO) underpricing using a sample of Australian firms going public over the period 1996–2003. We find that quality (Big Four) audit firms earn significantly higher fees than non-Big Four auditors, and audit quality is positively associated with IPO underpricing. The positive relation between audit quality and underpricing is more pronounced for small issues, IPOs underwritten by non-prestigious underwriters, and those that are not backed by venture capitalists. Taken together, our results suggest that quality auditors serve as a signalling device that enhances post-issue market value of equity.     

The underpricing of initial public offerings: A theoretical and empirical reconsideration of the adverse selection hypothesis

In this paper we generalize Rock's theory regarding the underpricing of IPOs. In Rock's model, informed investors have a firm-specific informational advantage pertaining to a firm's cash flow. We derive the new results that the level of beta and the size of the market risk premium positively affect underpricing. These implications extend the adverse selection theory and further distinguish this theory from the current state of signalling theories of underpricing. The results put the “hot and cold” issue markets phenomenon in a theoretical context. Empirical results are consistent with the theoretical propositions and provide support for Rock's theory of underpricing.     

Offer pricing of Australian industrial initial public offers

In the present paper we examine the setting of offer prices for Australian industrial initial public offers (IPOs) by fixed price offers. Our investigation focuses on the associations between offer prices and both market prices and accounting based measures of intrinsic value. Fixed‐price offers are less likely to be influenced by the canvassing of market demand when compared to the US setting, where book‐builds are typically used. We conclude that while Australian industrial IPOs are underpriced, they are not systematically undervalued. Contrary to research undertaken by Purnanandam and Swaminathan in the US book‐build setting, we do not conclude that Australian IPOs are systematically overvalued. As part of our analysis, we develop an empirical model of offer prices based on interviews with several leading Australian stockbrokers involved in setting them. Finally, using the ratio of offer price to intrinsic value measure, we find some evidence that undervaluation is positively related to underpricing.     

Litigation risk, strategic disclosure and the underpricing of initial public offerings

Using word content analysis on the time-series of IPO prospectuses, we show that issuers tradeoff underpricing and strategic disclosure as potential hedges against litigation risk. This tradeoff explains a significant fraction of the variation in prospectus revision patterns, IPO underpricing, the partial adjustment phenomenon, and litigation outcomes. We find that strong disclosure is an effective hedge against all types of lawsuits. Underpricing, however, is an effective hedge only against Section 11 lawsuits, those lawsuits which are most damaging to the underwriter. Underwriters who fail to adequately hedge litigation risk experience economically large penalties, including loss of market share.     

Earnings management and initial public offerings: Evidence from the Netherlands

This paper presents one of the first studies of earnings management by initial public offering (IPO) firms in a European country. Using a sample of 64 Dutch IPOs, we investigate the pattern of discretionary current accruals (DCA) over time. We find that managers manage their company's earnings in the first year as a public company but not in the years before the IPO. We also examine the impact of earnings management on the long-run stock price performance of IPOs. We find a negative relation between the size of the DCA in the first year as a public company and long-run stock price performance over the next 3 years. A number of additional tests support these findings.     

Single versus multiple banking: lessons from initial public offerings

A vast research in banking addresses the question of the costs and benefits of multiple bank relationships versus a single bank relationship. Although no clear-cutting conclusion is reached, several contributions suggest that multiple bank relationships might lead to a sub-optimal level of monitoring, compared to a single bank relationship, as a result of free riding and coordination problems. We take a novel approach to tackle this research question, by looking at the role, if any, played by the number of lending relationships in initial public offerings (IPOs). We look at the short-term performances of IPOs as measured by underpricing and find that firms that go public with multiple bank relationships exhibit more underpricing than those that go public with a single bank relationship. This finding is independent of the number of bank relationships and/or whether any of the lending banks also acts as underwriter in the offering. We interpret our results as suggesting that the market attributes a weaker certification role to multiple bank relationships because of their less effective monitoring of IPO firms.     

Patents and the performance of technology firms: Evidence from initial public offerings in Germany

The objective of this study is to analyze the relationship between innovation and performance for German firms that went public at the “Neuer Markt” during the period from 1997 to 2002. In the empirical analysis we investigate in particular whether initial public offerings (IPOs) with more or higher quality patents outperformed IPOs with lower quality or no patented technology. For this we measure the impact of patents on underpricing and long-run performance and explain the magnitude of these valuation effects with the Fama–French value and growth factors, with patent-specific variables such as the number of IPC-classes, family size, the number of backward and forward citations, as well as with industry variables. The empirical evidence suggests that patents are a reliable indicator for the success and the short- and long-run performance of start-up technology firms that went public and that the valuation effects are more pronounced for higher quality patents.

The waiting period of initial public offerings

The length of time it takes an IPO firm to go public (called ‘waiting period’) reflects multiple layers of scrutiny from underwriters, auditors, venture capitalists, institutional investors, and regulators. Accordingly, we show that the waiting period is a good barometer of ex ante uncertainty about future cash flows and that it has predictive power after the firm goes public. We find that firms marked by short waiting periods experience lower underpricing and less uncertainty and superior stock/operating performance in the aftermarket. We also report that smaller firms are taking longer to go public after SOX Act, thus providing justification for the 2012 JOBS Act.     

The effect of ownership and control on market valuation: Evidence from initial public offerings in The Netherlands

This study examines whether ownership and control variables influence market valuation at the time of the initial public offering (IPO). Using a sample of 118 IPOs on Euronext Amsterdam during the period 1984-2001, we find support for this conjecture. Management stock ownership, the proportion of independent supervisory directors, and board monitoring by large nonmanagement hareholders are positively related to IPO firm value. These factors are successful in reducing agency costs. We also find that supermajority management stock ownership and takeover defenses lower IPO firm value. Therefore, these mechanisms increase agency costs, resulting in a lower price that investors are willing to pay for IPO shares.     

International interest rates and US monetary policy announcements: Evidence from Hong Kong and Singapore

This paper investigates the responses of market interest rates to US monetary policy announcements for the US and two emerging economies, Hong Kong and Singapore which are similar on many respects but have experienced opposite exchange rate regimes in the last twenty years. Our results, based on market expectations extracted from federal fund futures rates, document that FOMC announcements significantly affect the term structure of interest rate in the US and both Asian countries. Further, international interest rate differentials around FOMC meeting dates tend to be negative for short maturities with the impact gradually dissipating as bond maturity increases. Finally, for the case of Singapore, we find that domestic interest rates react to both external and domestic monetary policy announcements with a magnitude that is larger over the full bond maturity spectrum for domestic announcements. These results are robust to time-varying futures risk premia and alternative measures of interest rates expectations.     

Warrants in IPOs: Evidence from Hong Kong

We examine whether the Hong Kong Stock Exchange listed firms include warrants in their initial public offerings (IPOs) to signal their quality. We show that IPOs with warrants have higher profitability and better asset utilization rates compared to IPOs without warrants. We also report evidence that after controlling for the level of retained ownership, the proportion of the firm value sold as warrants increases in firm's riskiness. The results from the self-selection model reveal that firms include warrants in their offerings to reduce underpricing relative to what it would have been in the absence of warrants. We conclude that warrants are more likely to be used for signaling purposes rather than as mechanisms to reduce the agency costs of free cash flow.     

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.     

Determinants of corporate tone in an initial public offering: Powerful CEOs versus well-functioning boards

Recent literature on initial public offerings (IPOs) suggests a significant effect of tone in IPO underpricing but ignores its determinants. This study concentrates on the factors that shape the tone of the information disclosed in IPOs. Sampling 211 Latin American IPOs during the period 2000–2019, we find empirical evidence that a powerful CEO can influence tone, avoiding unfavorable tone and fostering the use of positive words in the information disclosed to the market. We also show that more independent boards tend to use more unfavorable tones. Additionally, we find a non-monotonic relationship between board size and the tone in the prospectus, which suggests that an optimal board size mitigates the excessive use of positive tone and leads to more unfavorable tones in the IPO prospectus. Overall, well-functioning boards counterbalance powerful CEOs and generate more realistic disclosure to the market. Finally, we find that market-dominant auditors, age of the issuing firm, proposed use of proceeds, and the number of risk factors significantly affect the tone in the information disclosed.     

Investment trust IPOs: Issuing behaviour and price performance Evidence from the London Stock Exchange

In this paper, we document an average first day return of 1.91 percent for the population of 105 investment trust IPOs during the period from January 1984 through August 1992 on the London Stock Exchange. This is the first study that finds evidence of significant first day returns for a sample of closed-end fund IPOs. The results also suggest that investment trust IPOs are subject to ‘hot’ issue periods. These tend to occur when there is a marked narrowing in the discounts of seasoned investment trusts. Initial gains are, however, short lived; by the end of their first year, investment trust IPOs substantially underperform a number of relevant benchmarks and, on average, trade at discounts to their underlying net asset values.     

The long-run performance of initial public offerings and its determinants: the case of China

Existing research finds poor long-run performance of Initial Public Offerings (IPOs), particularly in the US. Using company IPO data from China’s Shanghai Stock Exchange, we find comparable levels of underperformance. In line with US results, initial overoptimism and the size of the offer are important explanatory factors for this underperformance. Additional variables include the earnings per share prior to listing, the decision to switch investment banks at the time of issue and whether the firm issues shares that can be purchased by foreign investors. These factors suggest that firms in China are able to manipulate the issue process. In the context of Chinese economic reforms, of particular note is the positive performance impact of the government shareholding after issue, which supports a signal argument in relation to continuing government support. As a result, we provide an interesting insight into the influence of the regulatory environment and economic transition on the long-run performance of IPOs in China.

Information effects of dividends: Evidence from the Hong Kong market

The literature has suggested that earnings and earnings forecasts provide stronger signals than dividends about future performance of a firm. We test the information effects of simultaneous announcement of earnings and dividends in the Hong Kong market, distinguished by three interesting features (concentrated family-shareholdings, low corporate transparency, and no tax on dividends). Our results show significant share price reactions to unexpected earnings and dividend changes, but dividends appear to play a dominant role over earnings in pricing, a result contrary to findings in the literature. The signaling hypothesis works primarily for firms with earning increases, while the maturity hypothesis works mainly for firms with earnings declines.

Earnings management and initial public offerings: The case of the depository industry

In a typical IPO, insiders are “net sellers” of IPO shares; however, in a demutualizing thrift, insiders are “net buyers” of IPO shares. Using a sample of mutual depository IPOs, we find evidence consistent with earnings management prior to the conversion of mutual thrifts. We find on average that mutuals report lower ROA and increased loan loss provisions and loan loss reserves in the period prior to the demutualization. Using a two-stage approach, we also find that the level of discretionary loan loss provisions and discretionary reserves are positively related to both the level of insider participation in the IPO and the first-day returns to investors. Our results are consistent with management of mutual thrifts benefiting at the conversion from reduced pre-IPO earnings and book equity resulting from earnings management.     

Forecast accuracy in initial public offerings and the impact of external constraints relative to managerial choice: a research note

We examine the accuracy of earnings forecasts published in prospectuses, under conditions where external influences of state regulation and economic condition act as constraints to mitigate management optimism. Our results indicate that regulation has no significant impact, but economic condition and management optimism are significantly associated with forecast accuracy. We conclude that a study of forecast accuracy over time must take into account external influences and that attempting to use regulation to improve forecast accuracy is not an effective strategy when there are strongly adverse economic conditions and when promoters or managers are optimistic in forecasting.     

The Determination of Rent in Shopping Centers: Some Evidence from Hong Kong

The purpose of this article is to assess the generality of previous empirical findings on the determinants of retail rent in shopping centers and validate their substantive robustness using data from Hong Kong. Consistent with previous findings, the rental rate of a retail unit is positively related to its customer-generating power and the size of the shopping center but negatively related to its own size. In contrast to previous findings, it is positively associated with chain stores and the age of the shopping center but not significantly related to several provisions in the lease.