Hot IPO Research Articles

A New Approach to Underpricing Phenomenon in Poland

The purpose of the article/hypothesis. The purpose of the article is to identify and assess the underpricing of initial public offerings in Poland on the regulated and alternative markets, considering the division of total underpricing into primary underpricing and secondary underpricing. The study also takes into account different types of IPOs (cold, neutral and hot). Such an approach to measuring underpricing based on the data coming from both the regulated market of the Warsaw Stock Exchange and the alternative market – NewConnect, is pioneering on the Polish market.
 Methodology. The statistical analysis covers 271 companies debuting on the regulated market of the Warsaw Stock Exchange between 2005 and 2022 and 585 companies debuting on the alternative market between 2007 and 2022. Total underpricing was divided into primary underpricing and secondary underpricing. All IPOs were split into cold, hot, and neutral offerings according to the secondary underpricing. T-tests for estimating the significance of the rate of returns were conducted for both the regulated and alternative markets. The correlations were estimated using Pearson’s index.
 Results of the research. The results of the analysis show that in Poland, the IPO underpricing occurring on the primary market is significantly positive, representing the remuneration of subscribers for participating in the initial public offering. Moreover, it is higher for an IPO on the alternative market than on the regulated market. In contrast, returns calculated from opening prices to closing prices on the first day of trading are negative in both markets, with lower returns in the NewConnect market. The average primary underpricing for cold IPOs is higher than for hot IPOs for both the regulated and alternative markets. Average secondary underpricing is negative for cold IPOs and positive for hot IPOs on both the regulated market and NewConnect. Furthermore, there is a significant positive correlation between primary and total underpricing regardless the hotness of the IPOs and a positive significant correlation between primary and secondary underpricing occurs only for hot offers while for cold offers it is negative.

IPO as a Key Process for a Successful Company

IPO is the most popular business practice today, which can be seen as the key to a successful company. IPO could bring a lot of benefits to the company like additional capital raised, a better international reputation, deeper consumer recognition, liquidate benefits for the shareholders and investors, greater employee benefits, and higher valuation because of transparency, compared to a private business. During the crisis, there was less focus on maximizing IPO proceeds due to both an increased emphasis on research coverage and allocations of hot IPOs to the personal brokerage accounts of issuing firm executives. But the company should consider the costs of IPOs carefully, initial underpricing is likely to cause underperformance in the long run, mandatory disclosures may increase the competitive cost, especially for biotech companies, and the substantial fees of an IPO have to be considered. In this paper, a literature study of the pros and cons of an IPO and IPOs are crucial to the development of a business.

Determinants of the IPO waves in the banking sector

The primary objective of this paper is to examine a number of variables that can have a significant impact on formation of IPO waves in the banking sector. As the banking industry has faced several crises during the last two decades that led to a tightening of control over the sector, banks actively resorted to the IPO market as a way to attract additional capital to cope with the strict regulation standards and expand their business activities. Banks tended to place their shares during hot IPO markets causing clusterization. The current study finds relationship between several macro variables that can affect formation of hot IPO markets leading to an increase in IPO volume.

Two Similarities, One Firm Value: A Natural Language Processing Study of IPOs’ First-Day Returns

Conflicting results tie audiences’ valuations to firms’ similarity to category prototypes or to outliers. Explanations of these results generally assume that prototypes and outliers have a strong weight in audiences’ valuations although audiences may use them differently in different contexts. We challenge this assumption and propose that the weight of prototype similarity and outlier similarity in audiences’ valuations is contingent on prototypes’ and outliers’ prominence in audiences’ eyes in a given context. Prototype similarity plays a lesser role in audiences’ valuation when specific knowledge rather than general knowledge is needed to value an entity. Outlier similarity plays a heavier role in audiences’ valuations when recent trends in the market recall outliers’ features to audiences. We measure prototype and outlier similarity by applying a natural language processing technique to 160,000 financial documents and test our hypotheses based on the first-day returns of 2,488 U.S. IPOs from 1996 to 2015. We find that firms with prototype similarity are less underpriced in low-tech industries, but that this effect disappears in high tech industries, where more specific knowledge is required to value any particular firm. Firms with outlier similarity are more underpriced, particularly during periods of hot IPO market, during which highly underpriced IPOs are recalled to investors. Our findings extend understandings of optimal distinctiveness, valuation, market categories, and computational approaches to strategy.

IPO cycles in Pakistan

This study investigates the cycles that IPO issuance produce in Pakistan and the US. We did not find evidence of a lead-lag relationship between IPO volume and initial returns in Pakistan; however, this evidence holds for the US IPOs. Another important finding is that Pakistani and US IPOs are sensitive to changes in market conditions. Moreover, we report evidence of emerging hot markets in Pakistan. This study compares the results of hot IPO markets to the proceeds obtained for firms that issue their shares and finds that firms raise more capital during hot markets; however, factors like regulatory regimes have different influences over the proceeds raised across the different markets.

The accuracy of earnings forecast in IPO prospectuses: Evidence from Indonesia

The financial information that attracts the attention of most investors is the earnings forecast. Because investors are more interested in the company's prospects in the future than historical information. But in reality earnings forecast is less accurate, while the factors that are suspected to influence give inconsistent findings. This study aims to determine the effect of the forecast horizon, underwriter reputation, auditor reputation, company size, company age, leverage ratio, industry type and IPO market on the accuracy of earnings forecast. The population of all companies that IPO in Indonesia Stock Exchange period 2015-2018, were selected using the purposive sampling method, obtained 107 samples. Secondary data were obtained from the company's prospectus and annual report. The analytical method used is multiple regression. The accuracy level of earnings forecasts is measured using forecast error numbers. Mean forecast error 28.86 percent is reported over the entire sample period. Then only underwriter reputation and company size have a significant positive effect on the accuracy of earnings forecasts. And the hot IPO market has a negative effect on the accuracy of earnings forecasts. The implications of research show that underwriter reputation, company size, and IPO market became the important indicators in determining investment strategies in IPO shares. JEL Classification: D82, G14, G17, R53 DOI: https://doi.org/10.26905/jkdp.v23i4.3509

The Persistence of IPO Mispricing and The Predictive Power of Flipping

Despite underwriters' efforts to balance supply and demand in the IPO price setting mechanism, we show that the market accurately predicts (in the first-day return and volume) the direction but not the full magnitude of underwriters' pricing errors. That is, first-day winners continue to be winners on average (outperforming a size-adjusted benchmark) over the first year, and first-day dogs continue to be relative dogs. A trading rule of buy first-day solid beginning at the close of the IPO's second trading day outperforms the portfolio of first-day losers by about 14% in the next year during the 1988-1995 time period. An exception to this rule is the performance of extra- hot IPOs (with a first-day return greater than 50 to 60%) which are poor one-year performers on average. We also find that a measure of flipping, the dollar volume of sell-motivated block trades as a percent of total dollar volume on the first-day, has significant power to predict future returns, lending credence to investors' of cold IPOs as a rational strategy. Furthermore, we show that first-day flipping can be predicted from ex ante factors. Thus, we conclude that underwriters' pricing errors at both extremes (initial cold and very hot IPOs) are intentional and strategic.

Do IPOs in Cold Markets Provide Better Returns

Significant listing day returns for IPOs is a phenomenon that is observed when companies go public. Using a larger timeframe (1999-2014), we attempt to determine the long-run performance of underpriced IPOs issued in an emerging economy such as India during the hot and cold IPO markets for 36-months. The results indicate that IPOs perform significantly better when issued during cold markets. We find that the distribution of returns is the same across cold and hot markets at specific periods during the 36-month period of study.

Network Prominence, Bargaining Power, and the Allocation of Value Capturing Rights in High-Tech Alliance Contracts

We suggest and provide empirical evidence that the bargaining power of alliance partners stemming from their prominence in alliance networks influences the ex-ante allocation of value capturing rights in high-tech alliance contracts. Network prominence can enhance the availability of alternative partners for a firm and thereby elevates the firm’s bargaining power and enables the firm to receive (i) more value capturing rights vis-à-vis its partner (i.e., more net value capturing rights) and (ii) more rights to the unexpected outcomes vis-à-vis its partner. We empirically investigate the content of research and development (R&D) collaboration contracts between biotech and pharmaceutical firms and show that as the prominence of the client (i.e., pharmaceutical firm) increases, it is able to attain (i) more net value capturing rights to outcomes within the area of collaboration and (ii) more rights to unexpected outcomes. By contrast, increased prominence of the R&D firm (i.e., biotech firm) decreases both the number of net value capturing rights the client receives as well as the rights to unexpected outcomes that the client captures in an alliance contract. The bargaining power that the R&D firm attains from its prominent position in alliance networks becomes less important during hot IPO markets, which provide the R&D firm more outside options to obtain financial resources. By documenting the importance of firms’ network positions as sources of bargaining power during alliance contracting, our paper contributes to the literature on strategic alliances, bargaining, and contract design.

Leaving money on the table in venture-backed biotechnology IPOs

This study analyzes first-day returns (underpricing) for venture-backed biotechnology IPOs during 1980 through 2015. The result of this study shows that the average first-day return was 17.5 percent, which translates into an amount equal to $6.3 billion that was left on the table - nearly triple the $2.2 billion in underwriter fees. The study provides different theoretical explanations to the underpricing phenomenon and discusses why venture capitalists may be willing to accept leaving money on the table. The analysis also shows that IPOs with a large degree of underpricing are concentrated in hot IPO markets such as during 1999-2000 and more recently in the years 2014-2015. Notable, eight of the thirteen venture-backed biotechnology IPOs with the largest amount of money left on the table in the history of biotechnology went public during 2014-2015. From an investor perspective, if the degree of underpricing is an indicator of a pricing bubble, as was the case in 1999-2000, rational investors should at least be a little bit concerned about the state of the biotechnology equity market. From a management and venture capitalist perspective, issuing firms should at least consider using auctions as opposed to book-building to price and allocate IPOs to decrease the degree of underpricing and thereby the amount of money left on the table.

Are Tunisian and Egyptian Share IPO Markets Hot or Cold?

This paper seeks to detect hot and cold IPO cycles in the Tunisian and Egyptian share market using a Markov regime switching model. Using a set of IPO activity measures (number of IPOs, level of underpricing, market conditions and duration), we established a model which estimates these activity measures in hot and cold periods respectively. We depicted the turning points for each activity measure. It is found that these markets are cold in the major period. As in regards to cycles, the segmentation method gives almost the same periods, except for the market condition measures (Trading volume for Tunisian stock market and Stock Market Returns (SMR) for Egyptian stock market) which give a different segmentation.

Leaders and followers in hot IPO markets

We model the dynamics of going public within an IPO wave. The model predicts that firms with better growth opportunities can find it optimal to go public early and accept underpricing of their issues to signal quality. Data supports this prediction as, on average, early movers underprice their issues significantly more and we show that leaders (early movers with high underpricing) obtain much higher valuations when going public than other IPO firms. Furthermore, after going public, leaders invest significantly more, their sales grow faster, and their profitability remains higher compared to other IPO firms.

Decimalization, IPO aftermath, and liquidity

We investigate the effect of decimalization on the aftermarket trading of NYSE-listed IPOs. We find that the relation between bid–ask spread and underpricing becomes negative post-decimalization, suggesting that benefits from the increased price competition accrue more to hot IPOs. The quoted depth is generally smaller post-decimalization due to a higher probability of front running, which aggravates the cost of adverse selection and limit order submission. We show that underwriters continue to provide price support but are only willing to cover the initial short position, if profitable to do so. Decimal pricing does not affect the flipping strategy of institutions for cold IPOs as they are likely bound by the underwriter’s price support and their share allocation. Institutions, however, tend to flip more hot IPOs during the post- than in the pre-decimalization period, suggesting that the cost of flipping is lower for shares with a substantial price run-up during aftermarket trading.

Innovation Waves, Investor Sentiment, and Mergers

We develop a theory of innovation waves, investor sentiment, and merger activity based on uncertainty aversion. Investors must typically decide whether or not to fund an innovative project with very limited knowledge of the odds of success, a situation that is best described as Knightian uncertainty. We show that uncertainty-averse investors are more optimistic on an innovation if they can also make contemporaneous investments in other innovative ventures. This means that uncertainty aversion makes investment in innovative projects strategic complements, which results in innovation waves. Innovation waves occur in our economy when there is a critical mass of innovative companies and are characterized by strong investor sentiment, high equity valuation in the technology sector, and hot IPO and M&A markets. We also argue that M&A promotes innovative activity and leads to greater innovation rates and firm valuations.

Can Institutional Investors Cherry-Pick Hot IPOs?

Using a unique dataset of institutional investor bids, we provide evidence that alongside uninformed institutions who regularly participate in the IPO market, there exist informed ones who can avoid cold issues and cherry-pick hot ones to earn higher returns. Uninformed institutions bid low in a manner consistent with Rock's (1986) winner's curse model, whereas informed institutions reveal their positive information by bidding high in hot issues, which agrees with Benveniste and Spindt's (1989) dynamic information acquisition model. The winner's curse problem precludes a significant upward revision in the offer price in response to private information revealed. Additional findings help tie together explanations of positive initial returns based on asymmetric information and investor sentiment.

Are the Hot IPOs Still Relevant? Evidence from China's Growth Enterprise Market

This paper investigates whether the hot IPO effect persists post-IPO in China's Growth Enterprise Market (GEM) based on the dynamic equicorrelation of trading volume and stock returns. We find that the hot IPO effect ends after two years with the imbalance between demand and supply for GEM stock relieved, which indicates that the rational learning process requires almost two years for most investors. Further, we confirm that returns and volumes are positively correlated at the 1% significance level. This result indicates that the fundamental analysis may not apply to the GEM because the information content of trading volume is capable of forecasting stock returns.

Pricing IPOs: An Approach for Spanish Firms

Pricing IPOs: An Approach for Spanish Firms Susana Álvarez Abstract The purpose of this paper is to analyse how IPO initial return volatility affects the valuation of firms that go public. The goal is to test whether the initial return volatility for evaluating the pricing of IPOs is relevant on the Spanish capital market, bearing in mind that the degree of ex-ante uncertainty regarding the value of the firm for IPOs in Spain is lower than in other countries, as is the level of underpricing. I also analyse how the main explanations found in the literature for the anomaly of underpricing are affected by this new metric of return volatility. The methodology used is maximum likelihood estimation (MLE) because it has important advantages. The main advantage of this approach is that it allows the estimation of the influence of each characteristic on both the level and the uncertainty of firm-level initial returns. The MLE affects positively to the efficiency of the estimations. Consistent with IPO theory, both the asymmetry of information hypothesis and the hot IPO market hypothesis are confirmed in this study. The results do not provide conclusive support for the signalling hypothesis for underpricing. Full Text: PDF DOI: 10.15640/jfbm.v3n1a7

Do IPO Hot and Cold Markets Exist at the Indonesia Stock Exchange?

This study focuses on IPO Initial Returns in Hot and Cold IPO Markets at the Indonesia Stock Exchange (IDX) between the period of 2001 and 2005. This study uses a regression analysis where the first day IPO stock return is the dependent variable and a dummy variable that represents Hot and Cold IPO Markets is the main independent variabel. It is found that Hot and Cold Markets do exist at the IDX. More importantly, it is found that the difference in IPO Initial Returns between Hot and Cold Markets while controlling for other factors is 36.8%. The Investment Sentiment Hypothesis has been found to explain the existence of Hot and Cold Markets. The hypothesis implies that jumps in IPO Initial Returns during Hot Markets are due to the increase in the first day closing prices which are higher than the increase in the offering prices. The Monopsony Power Hypothesis and information spillovers across IPOs respectively may also provide alternative explanations to the phenomenon. Investment banker community in a small economy learns information from each other and, thus, has full information on the number of firms that will go public in the following period. Consequently, investment bankers have a high bargaining power of investment bankers in lowering the offering prices.

Network Prominence, Bargaining Power, and the Allocation of Value Capture Rights in Alliance Contracts

We suggest and provide empirical evidence that the bargaining power of alliance partners stemming from their prominence in alliance networks influences the ex-ante allocation of value capturing rights in high-tech alliance contracts. Network prominence can enhance the availability of alternative partners for a firm, and thereby elevates the firm’s bargaining power and enables the firm to receive i) more value capturing rights vis-a-vis its partner (i.e., more net value capturing rights) and ii) more rights to the unexpected outcomes vis-a-vis its partner. We empirically investigate the content of R&D collaboration contracts between biotech and pharmaceutical firms and show that as the prominence of the client (i.e., pharmaceutical firm) increases, it is able to attain i) more net value capturing rights to outcomes within the area of collaboration and ii) more rights to unexpected outcomes. By contrast, increased prominence of the R&D firm (i.e., biotech firm) decreases both the number of net value capturing rights the client receives as well as the rights to unexpected outcomes that the client captures in an alliance contract. The bargaining power that the R&D firm attains from its prominent position in alliance networks becomes less important during hot IPO markets, which provide the R&D firm more outside options to obtain financial resources. Hence, our paper documents that firms’ network positions can be an important source of bargaining power, contributing to the literature on strategic alliances, bargaining, and contract design.

Motives and consequences of IPOs in cold periods

• We model the factors that could motivate firms to go public in a cold. • We compare the long-term performance of hot and cold period IPOS. • We find the firms go public in cold periods when their future earnings are likely to decline. • We find the cold period IPO firms are more likely to have managed their earnings. • We find that cold period IPO firms underperform hot period IPO firms in the long run. We analyze the motives and long-term stock price performance of firms that pursue IPOs in cold IPO periods. We find that firms are more likely to engage in an IPO during a cold period when their earnings are relatively high and are expected to decline in the future. We also find that IPO firms during a cold period are more likely to have managed their earnings prior to the IPO. Furthermore, we find that cold IPO firms experience significantly weaker stock price performance than hot IPO firms, and results are robust to different criteria for defining hot and cold IPO periods, different measures of stock price performance, and different investment holding periods. We find that investment opportunities, the backing of a venture capitalist, and an increase in earnings in the year of the IPO lead to significantly higher long term stock price performance of IPO firms. Our multivariate models confirm the adverse cold IPO period effect on stock price performance even after controlling for the IPO motives and the firm's earnings performance. Our results also hold within the post-Sarbanes-Oxley (SOX) era.