On the anticipation of IPO underpricing: Evidence from equity carve-outs

We investigate IPO market efficiency using a sample of equity carve-outs offered during the period of 1985–2005. Unlike IPOs examined in previous studies where trading during the pre-IPO book-building period does not exist and trading on the IPO date is rationed, in equity carve-outs, investors can trade in the non-rationed market for shares of the parent, which holds a significant fraction of the subsidiary. We find that the subsidiary's initial day return is significantly related to its parent's return over the book-building period, but unrelated to its parent's contemporaneous return. Neither the pre-IPO price revision of the subsidiary nor the return to the parent on the initial trading day can be predicted. While the portion of the subsidiary's initial return unpredictable from information available during the book-building period is significantly related to its parent's contemporaneous return, the predictable component of the initial return is not. We interpret these results as evidence consistent with market efficiency.     

Robust determinants of IPO underpricing and their implications for IPO research

Using several different methodologies, we quantify the statistical robustness of variables used in prior research to explain initial IPO returns. We establish a parsimonious list of robust variables and evaluate their implications for different theories of IPO underpricing and clustering. Further, we illustrate how using such a set of robust explanatory variables leads to several different conclusions than prior research that failed to include these important control variables. Researchers who identify new potential predictors of IPO initial returns should control for the list of robust variables we identify.     

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.     

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.     

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.     

IPO underpricing and mutual fund allocation: New evidence from registration system

We study the effect of mutual fund allocation on China's IPO market under the new registration system. The introduction of mutual fund bids significantly increases the IPO offer price, resulting in a low initial short-term return and suppressed IPO underpricing. Those newly listed stocks witness lower volatility in the following weeks due to preferential allocation to the mutual fund at the primary market. Further analysis suggests that large investors' net purchase strengthens IPO after-market return and volatility. Besides, the effect of mutual fund participation on IPOs is stronger in places where the COVID-19 outbreak. This new evidence suggests that mutual fund allocation plays a critical role in IPO price discovery and decreases investor lottery trading.     

Deliberate premarket underpricing and aftermarket mispricing: New insights on IPO pricing

We decompose initial returns into deliberate premarket underpricing and aftermarket mispricing using stochastic frontier analysis. We model deliberate underpricing as a function of proxies of information asymmetry surrounding IPO value between market participants. Equity retained is an unlikely signalling mechanism to convey IPO value to outside investors through deliberate premarket underpricing. The presence of lock-in agreements, underwriter fees, number of uses of proceeds, and venture capital or private equity backing have positive impacts on deliberate premarket underpricing. Demand for firms' capital also explains deliberate premarket underpricing, whereas new issues market conditions have no impact. All these factors are found to explain a significant fraction of the variations in our deliberate underpricing estimates. Deliberate underpricing is the more dominant component that makes up initial return when compared to the fraction of aftermarket mispricing. We attribute aftermarket mispricing to trading volume in IPO shares on the first day, price adjustment between the filing price range and the offer price, and offer size. Equity retained explains the aftermarket mispricing rather than the deliberate premarket underpricing in contradiction to the signalling argument. More reputable underwriters are likely to provide price support in the early aftermarket, whereas we observe no impact on deliberate premarket underpricing.     

Testing for deliberate underpricing in the IPO premarket: a stochastic frontier approach

We reevaluate the IPO underpricing phenomenon using the stochasticfrontier methodology. The advantage of the stochastic frontieris that it can be used to measure the level of deliberate underpricingin the premarket without using after-market information. Thisis accomplished through the estimation of a systematic one-sidederror term that measures 'inefficiency' or the difference betweenthe maximum predicted offer price and the actual offer price.Data for the analysis are comprised of 1,035 IPOs of commonstock issued by firm commitment between 1975 and 1984. IPOsappear to be deliberately underpriced in the premarket in bothhot-market and nonhot-market periods. Moreover, the determinantsof the maximum IPO price have different effects in the two timeperiods.     

The emerging growth company status on IPO: Auditor Effort,Valuation, and underpricing

The Securities Act of 1933 governs the going public process and the accompanying registration statement submissions to the Securities and Exchange Commission (SEC). The Jumpstart Our Business Start-ups (JOBS) Act of 2012 created several accommodations under the SEC securities laws for a new group of companies referred to as “emerging growth companies” (EGCs). We examine the associations between auditor effort, initial public offering (IPO) offer prices, and investors’ perceptions of the registrants’ intrinsic value (underpricing) and EGCs’ registration statements utilizing accommodations to reduce financial statement information disclosure. Our finding that auditor effort is reduced suggests that the potential for increased auditor risk for EGCs future financial statements could be higher because of issues related to financial statements not included in the registration statements. We also find a negative (positive) association between EGC filing and IPO offer prices (underpricing). Our results suggest potential unintended consequences associated with EGCs and that auditor effort might not be sufficient to reduce the possibility of future financial statement failures.     

Let us work together: The impact of customer strategic alliances on IPO underpricing and post-IPO performance

Leveraging the availability of three years of pre-IPO data and related vs unrelated-party customer information for Chinese firms, we examine the impact of customer strategic alliances (CSA) on IPO underpricing from 2007 to 2015. Our core findings suggest that IPO firms with CSAs have less IPO underpricing than those without such a relationship. The decrease in underpricing is more salient for IPO firms that have non-related-party customers. Additional analysis suggests that the core findings are primarily driven by firms with good information environment pre-IPO, including high audit quality, high analyst following, and low earnings management. We interpret the results as indicating that a good pre-IPO information environment enhances the credibility of CSA relationships and signals high IPO quality. Furthermore, we document that a CSA relationship has a positive impact on an IPO firm's post-IPO performance, especially when the firm has non-related-party customers. Overall, CSAs reduce IPO underpricing and enhance IPO returns post-IPO.     

Differences of opinion,institutional bids,and IPO underpricing

Miller (1977) hypothesizes that IPO underpricing arises because the issue price is based on the average opinion while the aftermarket price is set by a minority of optimistic investors. Using a unique data set of institutional bids for a large sample of Chinese IPOs, we show that the IPO issue price is positively related to the quantity-weighted average bid price and unrelated to the market-clearing bid price. In contrast, the first-day closing price is positively related to the market-clearing bid price and unrelated to the average bid price. Overall, our results provide strong support for Miller's explanation of IPO underpricing.     

创业板市场IPO定价效率研究——来自香港市场的经验证据

本文对香港创业板市场IPO抑价现象进行了实证检验，研究表明，香港创业板IPO市场定价效率相对较低：风险投资家能够带领风险企业提前上市并得到投资者认同；IPO企业经营年限、价值不确定性及IPO发行时信息处理效率等变量对香港创业板IPO市场定价效率有显著影响：承销商、审计事务所的鉴证功能得不到体现；高效的IPO发行机制有利于创业板IPO市场效率的提高。     

Issuer-oriented underpricing costs in initial public offers: Evidence from Hong Kong

This paper estimates the underpricing cost associated with new shares issued and sold when firms go public in a traditional British-style IPO market in contrast to prior work which focussed on the underpricing cost to pre-IPO investors. Secondly, the estimates account for interest income on application funds received by issuing firms. Using data from the Hong Kong IPO market, the results show that the issuer underpricing cost of new share issues is on average only 14% of headline underpricing. When interest on application funds is taken into account, net issuer underpricing cost reduces to just around 7% of headline underpricing. This finding provides a compelling explanation of why issuing companies may not be concerned about underpricing in traditional British-style IPO markets. Thirdly, we also find that pre-IPO investors take steps to minimise wealth transfer to new investors either by selling a very small proportion or none of their pre-IPO shares. These findings suggest that explanations of IPO underpricing to the various parties involved in the process should, in part, be sought in the institutional structures and investment banking practices of the relevant primary capital market.     

An international look at the lawsuit avoidance hypothesis of IPO underpricing

We examine the relationship between IPO underpricing and litigation risk in an international setting using a sample of 13,759 firms that went public across 40 countries between 1991 and 2011. While the majority of single-country studies do not find support for the lawsuit avoidance hypothesis, we find a significant positive relationship between litigation risk and underpricing in a cross-country framework. Contrary to all single-country legal liability studies outside the U.S. and consistent with the U.S. studies of Tiniç (1988) and Lowry and Shu (2002), our empirical results support the insurance effect of the lawsuit avoidance hypothesis in an international context. Our findings imply that the degree of litigation risk in a given country affects the level of underpricing for firms that go public in that country. We conclude that differences in legal risk factors can partially explain differences in underpricing across countries.     

Underwriter reputation and IPO underpricing: The role of institutional investors in the Chinese growth enterprise market

This paper investigates the effects of underwriter reputation on initial public offering (IPO) underpricing in the Chinese Growth Enterprise Market, in light of the conflicting evidence in the literature on IPO underpricing. Using data during the post global financial crisis period, we find that IPO firms with prestigious underwriters have lower market-adjusted initial returns on average. We further find that prestigious underwriters reduce IPO underpricing by minimizing the time gap between the offering and listing, choosing high-quality firms to underwrite, and reducing information asymmetry between issuers and investors. In the presence of institutional investors, however, we find that more underpricing occurs, as these investors tend to obtain access to IPO shares at a higher price discount via private placements. This new finding suggests that the institutional investors have a role to play in the case of high under-pricing, which partly gets corrected via underwriter reputation.     

审计失败与会计师事务所声誉损失:来自IPO审核的证据

本文分析了会计师事务所审计失败对其客户IPO审核拒绝率的影响。我们研究发现,会计师事务所审计失败会导致其声誉损失,其客户的IPO审核拒绝率将显著提高。发生审计失败后,不管事务所是否受到监管处罚,其客户的IPO审核拒绝率都会显著提高,但审计失败后受处罚的会计师事务所(受处罚所)的客户IPO审核拒绝率显著高于审计失败后未受处罚的会计师事务所(未受处罚所)的客户IPO审核拒绝率,即监管处罚对会计师事务所的声誉产生了更严重的后果。我们进一步发现,不同类型的会计师事务所,审计失败对其客户IPO审核拒绝率的影响不同。     

Explaining underpricing of IPOs in frontier markets: Evidence from the Nigeria Stock Exchange

The paper provides empirical analyses of IPO underpricing on the Nigerian Stock Exchange, from the period 1990 to 2006. The results indicate an average abnormal initial day returns of 43.1%. There is evidence of long-run underperformance of 0.6%. Results from our regression model explaining initial abnormal returns for the IPOs of Nigeria show that size of firm and audit quality are important variables affecting underpricing. The results also show the presence of a non-linear relationship between the offer price and underpricing.     

Pension funds and IPO pricing. Evidence from a quasi-experiment

We exploit a quasi-experiment arising from the government-forced changes to the assets under management and investment policy of the Polish pension funds. We test whether this new regulation and its resultant demand shock on the investors' side, leads to changes in the IPO pricing and the subsequent stock's performance. We report material and a statistically significant decrease in the IPO proceeds (IPO size) in the post-treatment period equal to over 107 million PLN (34 million USD). We find no empirical evidence that the treatment had a significant effect on the first-day IPO underpricing or on the long-term underperformance. We conclude that the demand shock resulting from the pension system reform that primarily aimed at solving fiscal problems effectively eliminated the so-called ‘pension premium’ of higher IPO valuations. Thus, it indirectly impaired companies' power of raising money in the public stock market. Furthermore, we report a decrease in the average first-day IPO returns among big issuers that is consistent with the book building literature.     

Simultaneous effects of clustering and endogeneity on the underpricing difference of IPO firms: A global evidence

This paper provides the first empirical examination of the Entrepreneurial Wealth Losses (EWL) theory in explaining the global underpricing difference while simultaneously accounting for various clustering effects on the endogenous underwriter-underpricing relationship. We carefully evaluate the effect of clustering in standard errors within years, industries, countries, and developed versus developing countries. Employed here is a large global dataset comprising 10,212 IPO-issuing firms from 22 developed and developing countries between 1995 and 2016. Our 2SLS results provide strong evidence relating the existence of dispersion in underpricing in the global IPO market to the three dimensions of the EWL theory. When the degree of ex-ante uncertainty surrounding the time of offering is high, results show that in countries with a high level of IPO underpricing, issuers sell less secondary shares, create less primary shares, and employ less reputable underwriters. After adjusting for the clustering effect, the EWL model fails in cross-country settings and in developing stock markets while it succeeds in developed ones. This is due to the failure to capture the endogenous underwriter reputation-underpricing relationship. We show how ignoring one- and two-way clustering effects in the IPO data influences results. The validity of the EWL model particularly the statistical significance of the endogenous underwriter reputation-underpricing relationship vanishes based on the way we cluster our standard errors. Instead, we uncover conclusive evidence supporting the spinning behavior rationale where prestigious underwriters in developing equity markets burden IPO firms with a hefty underwriting fee. Sequentially, they leave big amounts of money on the table for investors to cash it out at the expense of issuers. Entrepreneurs in developing nations appear not to be concerned by this spinning practice, because they care little about their wealth losses in exchange for securing successful offering. Policy-wise, the paper provides several practical contributions.