Does pre‐deal research reduce IPO underpricing?

Abstract

PurposeThe purpose of this paper is to examine differences in underpricing for initial public offerings (IPOs) brought to market in Hong Kong, Singapore, and the United States. It intends to determine whether IPO pricing accuracy in Hong Kong is facilitated by the development and dissemination of pre‐deal research.Design/methodology/approachThe study examines a broad sample of initial public offerings made between 2000 and 2004. The author conducts univariate and multivariate tests to assess the relationship between IPO underpricing and the dissemination of pre‐deal research.FindingsThe author finds that Hong Kong issues experience significantly less underpricing than issues listed in Singapore and the United States. The underpricing of Singapore IPOs, on average, is not significantly different from that of US new listings. Furthermore, the author finds underpricing experienced by Hong Kong issues after adoption of the 40‐day post‐IPO quiet period is significantly higher than underpricing in the pre‐regulation period.Research limitations/implicationsThe results may not be generalizable to different countries. They do, however, appear to be robust in the three markets throughout the five‐year sample period.Practical limitations/implicationsTo the extent that pre‐deal research can enhance IPO pricing accuracy, the overall finding should be useful to regulators in Hong Kong and Singapore as they continue to evaluate the extent to which pre‐deal research should be allowed and other IPO related policy making.Originality/valueThe paper extends the IPO underpricing literature in a new direction and also documents a significant economic benefit to IPOs related to pre‐deal research.