Initial Public Offerings Initial Returns Research Articles

Investor Sentiment, Market Volatility, and IPO Initial Returns

This research seeks to determine the impact of investor sentiment and market volatility on IPO initial return when an issuer conducts an Initial Public Offering (IPO). This research lasted ten years, from 2009 to 2020, with a total issuer of 237 conducting Initial Public Offerings (IPOs) on the Indonesia Stock Exchange. The total number of issuers conducting an initial public offering (IPO) met the purposive sampling criteria is 285. Multiple linear regression analysis, with control variables such as Gap of Days, Firm Age, IPO Size, and Firm Size, is used to determine the effect of Investor Sentiment and Market Volatility on IPO Initial Returns. The findings showed that Investor Sentiment and Market Volatility positively affected the IPO Initial Return during the study period. This research aims to increase investor awareness of the importance of IPO stock price, increasing the initial return in the future. In Indonesia, Otoritas Jasa Keuangan (OJK) plays a critical role in policies that facilitate Indonesian investors' monitoring of the volatility of stock price changes in the market.JEL: M2, M21

Corporate ownership and political connections: Evidence from post-IPO long term performance in China

This paper constructs a practical framework to illuminate how political connections influence the material performance of initial public offerings (IPOs) for Chinese firms. An important dimension of the paper is to decompose the effects of political connections into three types: (i) policy burdens, (ii) investor protection, and (iii) government patronage, ascribed to the grabbing hand, the invisible hand, and the helping hand, respectively. We find that the positive effect of political connections on the long-term performance of family-controlled firms, is attributed to investor protection and government patronage. The lack of significant effect of political connections on state-controlled firms is due to the offsetting of policy burdens and government patronage. We also find political connections to have a significantly positive effect on IPO initial returns for state-controlled firms, but just a moderate effect for family-controlled firms. This study offers deep insight to policy makers into the effect of political connections on IPO long-term performance.

The impact of changes in regulations on Malaysian IPOs

PurposeThis study aims to examine the changes in equity guidelines and initial returns in the Malaysian initial public offering (IPO) market.Design/methodology/approachThe study uses cross-sectional data over 16 years from 2000 to 2016. It uses ordinary least squares for the baseline model and incorporates an interaction term, quantile regression, quadratic term, break test and logit regression model for further analysis.FindingsThe results support the propositions that lockup provisions signal commitment and demand increase initial returns. The revision in the Bumiputera equity requirement means that issuers no longer need to discount offer prices to entice investors. Finally, the revised Sharīʿah-compliance screening requirement ensures that stocks are better in quality and more transparent, leading to a higher demand that drives prices upwards.Research limitations/implicationsThis study’s findings provide insights into how issuers can secure good subscriptions. Besides, policymakers should ensure that firms disclose the required information in their prospectuses.Originality/valueThis study adds to the body of knowledge on whether and how the regulatory requirements affect IPO initial returns.

Intended use of IPO proceeds and initial returns

PurposeThis study aims to investigate the effects of the intended use of initial public offerings (IPO) proceeds that is disclosed in the prospectus on IPO initial returns.Design/methodology/approachA sample of IPOs listed on Bursa Malaysia from 2005 to 2015 is used. The intended use of IPO proceeds is categorised into three uses, namely, growth opportunities, debt repayment and working capital. In addition to ordinary least squares regression, the study applies a more sophisticated and robust approach using the quantile regression technique.FindingsThe results show that the intended use of IPO proceeds for growth opportunities and working capital is positively associated with IPO initial returns, whereas debt repayment is negatively associated with IPO initial returns. When the intended use of IPO proceeds for growth opportunities is further expanded into capital expenditure (CAPEX) and research and development (R&D), the intended use of IPO proceeds for CAPEX is positively associated with IPO initial returns, whereas R&D is negatively associated with IPO initial returns.Research limitations/implicationsThese findings suggest that intended use of IPO proceeds provides useful information about IPO initial returns and investors can use this information as guidance to make informed decisions. In addition, regulatory authorities should pay close attention to the amount allocated to each intended use of IPO proceeds as this may play a critical role in the success of a company and the economy.Originality/valueThis study gives new empirical evidence on the desire and motivations of IPO and the usefulness of designated use of IPO proceeds disclosed in the prospectus in explaining IPO initial returns.

Underpinning Theories of IPO Underpricing: Evidence from Malaysia

Using the initial returns (offer-to-close and offer-to-open), we investigate the influence of winner’s curse, bandwagon effect, IPO lockup, size effect, and underwriters’ reputation on Initial Public Offering (IPO) underpricing in Malaysia. Based on the sample size of 114 IPO firms listed on Bursa Malaysia from January 2010 to December 2017, the finding shows that the influence of size effect is significant on both types of initial returns, that the smaller the size of the firm, the higher the mean initial return gets. We interpret it as investors’ demand for a more appealing initial return as compensation for the greater risk exposure when investing in a smaller firm. On the other hand, we found an insignificant result in terms of the relationship between the types of offer and the IPO initial returns. Thus our findings do not support the winner’s curse theory which suggests that non-private placement is associated with a higher initial return due to the adverse selection problem. We also do not find any significant relationship between IPO lockup and underpricing. Nonetheless, underwriters’ reputation is found to be negatively associated with the initial returns. This finding somehow agrees with the hypotheses made in the previous studies—where some claimed that underwriters with high reputation are able to reduce first-day initial return. Overall, the results indicate that investors keen on IPOs are still able to centre their decisions around the theories above in the quest for greater investment returns.

Media Coverage and IPO Pricing around the World

We study how media coverage impacts pricing of initial public offerings (IPOs) around the world. Higher media coverage in the pre-IPO period leads to lower IPO initial returns. The effect is mitigated in countries with better financial reporting quality, greater shareholder rights protection, and more stringent media censorship, and for IPOs “certified” by reputable intermediaries, while it is amplified in countries with higher levels of media penetration and media trust. Further, IPOs with higher pre-IPO media coverage have lower ex post price revision volatility. Our findings suggest that higher pre-IPO media coverage reduces information asymmetry among investors, leading to less underpriced IPOs.

Signalling IPO quality through female directors

Purpose The purpose of this paper is to investigate whether or not the presence of female directors at the time of an initial public offering (IPO) can be considered as a signal of IPO quality. Design/methodology/approach A sample of 220 Malaysian IPOs over the period of 2005–2015 was used. This study employed the mean regression technique (ordinary least squares and White’s heteroskedasticity-consistent standard errors) and the median regression technique (quantile regression) to examine the signalling power of female directors on the board at the time of an IPO. Findings The results show that the presence and proportion of female directors at the time of the IPO have negative effects on IPO initial returns (IR). The negative effects occur at both the conditional mean and the dispersion of IPO IR. These results are robust to endogeneity bias. Practical implications The findings of this study suggest that female directors on the board at the time of an IPO can be considered as a desirable signal of IPO quality. As a result, IPO issuers can consider signalling the quality of their IPOs by having female directors on their boards. Likewise, market participants can use female directors as an instrument to value an IPO. Originality/value Studies on the impact of female directors on the board have largely been centred on established companies. Thus, this study contributes to the literature by examining the signalling role of women at the time of an IPO, which is considered as a significant milestone in the lifecycle of a company.

Institutional characteristics, signaling variables and IPO initial returns

Purpose This paper aims to provide empirical evidence on the extent of alteration institutional characteristics, i.e. legal origin and corruption levels, may have on the signaling effects of auditors’ reputation, underwriters’ reputation and ownership retention on initial public offering (IPO) initial returns in OECD countries. Design/methodology/approach Cross-sectional data composed of 6,182 IPOs from 30 OECD countries are used for 2003-2012. Ordinary least square with multiple linear regressions is used to test the hypotheses. Findings The findings indicate that the legal framework and corruption level of a country alters the signaling effects of underwriters’ reputation, auditors’ reputation and ownership retention in an IPO environment. These three variables mitigate information asymmetry, signal firm value to potential investors and ultimately decrease IPO initial returns. This relationship is more significant in the civil law countries. Corruption levels negatively moderate the relationship in the common law and Scandinavian civil law countries but have no significance in the German and French civil law countries, indicating the importance of the signaling variables in these two civil law countries. Originality/value This study examines the extent of the alterations that the legal framework and the corruption levels cause to the signaling relationship between auditors’ reputation, underwriters’ reputation and ownership retention on IPO initial returns in selected OECD countries.

The Impact of Global Financial Crisis on IPO Underpricing in Malaysian Stock Market

This study examines the impact of the Global Financial Crisis (GFC) on Initial Public Offering (IPO) underpricing in the context of an emerging market from January 2006 to December 2011. Models consist of hierarchical and dummy variable regressions have been evaluated. Our results show, firstly, by comparison between the pre-GFC, GFC and post-GFC periods, it can be observed that IPOs initial returns (offer-to-close) are generally lower due to the crisis. Secondly, IPO underpricing provides an average of 17–25% of initial returns in the pre-GFC period, 1–3% during GFC period, and 3–7% in the post-GFC period. Thirdly, the financial crisis does not act as a moderator that worsens the relationship between underpricing of IPO and oversubscription ratio. Lastly, this study dispels the notion that investors should totally shun IPO during crisis period as there are still positive initial returns among the new issues. To the authors’ knowledge, this is the first study on the impact of the GFC on IPO underpricing in Malaysia.

Impact of disclosure of risk factors on the initial returns of initial public offerings (IPOs)

PurposeWhen a firm goes public for the first time, its prospectus serves as an important reference for investors. It is required by regulation that the risk factors which have significant influence on the business be disclosed in the prospectus. The purpose of this study is to analyze how disclosure of these risk factors influences the initial returns of initial public offerings (IPOs).Design/methodology/approachTo do this, a sample of 96 Malaysian new equity offerings (IPOs) from year 2009 to year 2013 is used. Ordinary least squares regression technique is used to regress initial returns against risk disclosures. Aside from overall risk disclosure, individual dimensions of risk (internal risk, external risk and investment risk) are also considered.FindingsResults of the regression analyses reveal a direct relationship between the IPO initial returns and the disclosure of risk. Overall risk disclosure is found to be highly significant in influencing initial returns. However, further investigation into the individual group of risks shows that only investment risk is highly significant in influencing IPO initial returns.Originality/valueThe results found in this study are interesting as, unlike prior studies, it is shown that disclosures of internal and external risks are not significant in influencing investors’ actions possibly because of their generalizability, whereas disclosures related to investment risks are significant. Equity of firms which disclose more of its risk factors can be expected to generate higher initial returns.

Determinants of IPO Underpricing on the Warsaw Stock Exchange

Purpose – the objective of this paper is to provide evidence on the initial return (IR) of Initial Public Offerings (IPO) on the stock market in Poland and to identify determinants of the IPO initial returns on the Warsaw Stock Exchange (WSE) in the period between years 2005 and 2015. Design/Methodology/Approach – empirical analysis and regression results estimation based on informa-tion derived from databases such as: Bloomberg, Dealogic, and MergerMarket. Findings – the paper provides evidence for information asymmetry, behavioural as well as ownership and structure theories. The results identify six variables which have an impact on the degree of underpricing namely, involvement of PE and VC funds in the ownership structure of a company undertaking an IPO, new shares issued as a percentage of an IPO’s total proceeds, ex-ante uncertainty measured by Parkinson’s extreme value, an IPO price being set at the maximum of the bookbuilding range, turnover of shares traded during the debut date as well as the stock market return six months prior to an IPO. Originality/value – this paper contributes to the literature providing new evidence on a relatively little re-searched IPO underpricing phenomenon and determinants on the Polish stock market.

Non-linear dynamics of hot and cold cycles in Indian IPO markets: evidence from Markov regime-switching vector autoregressive model

ABSTRACTThe study aims to examine non-linear relationship between initial public offering (IPO) volume and average monthly initial returns for ‘hot’ and ‘cold’ issuing cycles in the Indian IPO markets using a two-state Markov regime-switching vector autoregressive model. The sample considers 557 IPOs during the period 2004–2014. The study establishes the presence of hot and cold states in Indian IPO markets. It finds bidirectional causality between IPO volume and initial returns for ‘hot’ issuing periods. The empirical findings suggest that the market possesses valuable information content in terms of the past issuing activity which has the potential to increase the predictability of future market behaviour.

Underwriter networks, investor attention, and initial public offerings

Using various centrality measures from social network analysis, we analyze how the location of a lead initial public offering (IPO) underwriter in its network of investment banks affects various IPO characteristics. We hypothesize that investment banking networks allow lead IPO underwriters to induce institutions to pay attention to the firms they take public and to perform two information-related roles during the IPO process: an information dissemination role, in which the lead underwriter uses its investment banking network to disseminate noisy information about various aspects of the IPO firm to institutional investors; and an information extraction role, in which the lead underwriter uses its investment banking network to extract information useful in pricing the IPO firm equity from institutional investors. Based on these two roles, we develop testable hypotheses relating lead IPO underwriter centrality to the IPO characteristics of firms they take public. We find that more central lead IPO underwriters are associated with larger absolute values of offer price revisions, greater IPO and after-market valuations, larger IPO initial returns, greater institutional investor equity holdings and analyst coverage immediately post-IPO, greater stock liquidity post-IPO, and better long-run stock returns. Using a hand-collected data set of pre-IPO media coverage as a proxy for investor attention, we show that an important channel through which more central lead IPO underwriters achieve favorable IPO characteristics is by attracting greater investor attention to the IPOs underwritten by them.

Firm-specific risk and IPO market cycles

This article characterizes the role of risk in the initial public offering (IPO) cycle. While most of the previous literature uses the volatility of IPO initial returns to measure risk, we focus on different risk measures, namely firm-level systematic and idiosyncratic volatilities and the market-wide implied volatility index (VIX), to assess their role in the IPO cycle. Our results shed new light on (1) which risk measure is important in the determination of IPO cycles, (2) the temporal pattern of each risk component across issuing firms and (3) the relationship between market-wide uncertainty and IPO risk. Our findings reveal a lead-lag relationship between IPO waves, VIX and the IPO systematic risk measure. We also highlight the fact that market-level uncertainty predicts IPO activity and the level of idiosyncratic risk of the next-period-issuing firms. Issuing firms’ systematic risk can only be predicted by the systematic risk of firms now proceeding to their offering. The main implication resulting from our study is that one can better anticipate ‘hot-issue’ markets, as well as the specific risk components of future new issues. This will help improve upon the regulatory environment, IPO investment decisions and IPO timing given market receptivity.

Information environment, market-wide sentiment and IPO initial returns: Evidence from analyst forecasts before listing

Measuring the information environment of firms using analyst (price) forecast bias and forecast dispersion before listing, we empirically examine the interactive influence of the information environment and market-wide sentiment on the initial returns of initial public offerings (IPOs). We find the smaller the analyst forecast bias/dispersion, the lower the effect market-wide sentiment has on IPO initial returns. This finding indicates that information asymmetry is a basic reason for noise trading occurs and demonstrates the positive effect of financial analysts during IPOs. In addition, the effect of analyst forecasts is more pronounced during periods of rising markets and when IPO prices are not regulated.

Do Export Activities Matter for the Performance and Survival of IPO Firms?

We examine the effect of export activity on the pricing of initial public offerings (IPOs) and their post-IPO performance and survival. On the one hand, foreign market operations diversify a firm’s revenue base and the risk of domestic cash flow shocks and may also provide an entree into foreign sources of financing. On the other hand, export activity may bring additional risk and complexity leading to greater uncertainty about the pricing of the IPO. Indeed, relative to non-exporting IPO firms, exporting IPO firms are significantly smaller, are riskier according to standard measures, and have higher expenditures on research and development. Using a sample of 4,837 IPO firms from 1986 to 2010, we find that IPO firms with export activity have a significantly lower level of underpricing than IPO firms without export activity after controlling for all factors known to influence IPO initial returns. In addition, the risk-adjust returns of exporting IPO firms outperform non-exporting IPO firms by 55 - 122 basis points on a monthly basis over either three or five year periods after the IPO. Our initial return and long-run return results are highly robust to propensity score matching techniques which account for possible reversed causality and selection bias. Lastly, we find that exporting IPO firms have significantly higher survival rates than non-exporting IPO firms; the hazard rate of firms that export around IPO years is 54 - 71% of firms that do not export. Overall, we provide strong evidence that export activity has an economically significant effect on the valuation and subsequent performance of IPO firms.

The determinants of IPO initial returns for Chinese A-shares: an application of quantile regression

This paper investigates the determinants of initial public offering (IPO) initial returns for a sample of Chinese A-shares, the period from January 1993 to August 2006. Some features are highlighted in our paper as follows. First, in order to investigate the difference of determinants of IPO initial returns between the high and low initial returns, this paper applies the Quantile Regression (QR, hereafter) method. Second, this paper is the first of its kind to derive and explore the economic implications of the effect of market returns on the market-adjusted initial return. Third, we also take into consideration the important factors of “Macro Regulation and Control” and the “Reform of the Offering Price Model” in studying the IPO initial returns of A-shares. The results of the estimation are as follows. First, there are various differences between high and low initial returns, meaning that the empirical results of the quantile regression are more capable of describing the impact of the explanatory variables on the high and low IPO initial returns. Secondly, the macro controls and the reforms do in fact mitigate the high IPO initial returns. Third, the positive effect of the market returns on the high market-adjusted initial returns (IPO initial returns) indicates that these two returns move in the same direction, but that the volatility of the market-adjusted returns is higher than that of the market returns.

Endogenous examination of underwriter reputation and IPO returns

PurposeThe purpose of this paper is to examine the relationship between underwriter reputation and initial public offerings (IPOs) initial returns over a 24‐year period, from 1980 to 2003.Design/methodology/approachTwo‐stage least‐squares regression analysis on data from IPOs offered from 1980 to 2003 is used to determine how the choice of IPO underwriter is related to initial returns when considering reputation as an endogenous variable.FindingsThis study shows, consistent with prior literature, that underwriter reputation is statistically significantly negatively related to initial returns from 1980 to 1991 and statistically significantly positively related to initial returns from 1992 to 2003, when reputation is taken as an exogenous variable. When considering the choice of the reputation of underwriter as endogenous to characteristics of the firm, the reputation of an underwriter is significantly positively related to IPO initial returns for 1980 to 2003 and 1992 to 2003 and insignificantly related, for 1980 to 1991.Originality/valueThis study adds value to finance literature in that it extends the research on the relationship between IPO initial returns and underwriter reputation. It also furthers the existing research on IPO anomalies and notes characteristics in this field of financial markets that may be important to both issuers and investment banks.

The Underpricing and Excess Returns of Initial Public Offerings in Taiwan Based on the Noisy Trading: A Stochastic Frontier Model

It is well known that initial public offerings (IPOs) are typically offered at prices lower than the transaction prices in the early aftermarket. However, the gap between the offer price and the aftermarket transaction price may be attributed to the underpricing of IPOs or the noisy trading activities in the early aftermarket. In this paper, we employ a stochastic frontier model to measure the fair offer price of an IPO and then measure the deliberate underpricing of the IPO and the market misvaluation based on the estimated fair offer price. Our results show that IPOs are deliberately underpriced. However, the extent of underpricing is not related to the hotness of the market. Instead, the extent of noisy trading leading to the market transaction price explains the excess return of IPOs, which is related to the hotness of the market. Hence, we conclude that IPO initial returns mostly result from the noisy trading activities instead of the deliberate underpricing of IPOs.

An Empirical Investigation of Underpricing in Chinese IPOs

In this paper, we empirically identify some of the causes of cross-sectional differences in underpricing of Chinese initial public offerings (IPOs) using data compiled for 308 firm-commitment A-share IPOs (available only to Chinese investors) and 57 B-share IPOs (available only to foreign investors). We first formulate and estimate a benchmark empirical model that relates IPO initial returns to variables widely used in studies of IPO underpricing. Then we test three hypotheses that may help explain the high A- share IPO underpricing in China. We find that IPO underpricing is the largest at the earliest stage of development of stock markets in China. The extraordinarily large IPO underpricing is at least partially due to a relatively small aggregate supply of shares. We also find that A-share IPO underpricing is better explained by a signaling model that relates IPO underpricing to subsequent seasoned equity offerings (SEOs) than by one linking government or employee ownership to equilibrium IPO underpricing. Issuers with larger IPO underpricing are more likely to raise larger amounts of capital through SEOs more quickly. The results support the notion that the primary purpose for Chinese firms going public is to raise capital, not to transfer ownership from state to private citizens. Moreover, we do not find any evidence that lottery mechanisms have contributed to the high IPO underpricing in China. Finally, we find some evidence that the difference in IPO underpricing among A and B shares can be explained by the differences in domestic and foreign investors' investment opportunities and investment sentiments.