Initial Public Offering Investors Research Articles

Mamaearth IPO: the pricing dilemma of a startup

Learning outcomes After working through the case and assignment questions, students will be able to recognize essential considerations for the initial public offerings (IPO) decision, compare different types of fundraising options for startups, evaluate the free pricing regime for IPO pricing, examine the pricing process of IPOs, explore the issue of valuation of IPOs and assess the decision choices of the founder regarding IPO given the trade-offs and market conditions. Case overview/synopsis The case study explores the dilemma of Ghazal Alagh, the co-founder and chief innovation officer of Mamaearth, a direct-to-consumer babycare and skincare unicorn, regarding its IPO decision. Mamaearth had filed the draft offer document with SEBI in December 2022, and Ghazal was busy engaging with the investment bankers for the upcoming IPO. However, the weak market sentiments and shelving of IPO plans by many startups were forcing her to think about facing the possibility of postponing the IPO or continuing the IPO process but at lower valuations. The case study provides an opportunity to explore a startup’s financing choices. It allows for discussion of various IPO challenges from the perspectives of founders, venture investors, regulators, investment bankers and new IPO investors. Complexity academic level This case study is best suited for senior undergraduate- and graduate-level business school students in courses focusing on entrepreneurship, corporate finance, financial management, strategic management and investment banking. Subject code CSS1: Accounting and finance. Supplementary materials Teaching notes are available for educators only.

Social Media Emotions and IPO Returns

AbstractI explore how investor emotions on StockTwits and Twitter affect initial public offering (IPO) returns. High pre‐IPO enthusiasm is linked to greater initial returns but eventual long‐term underperformance. IPOs with strong early excitement average a 29.73% initial return, but suffer a −8.22% long‐term industry‐adjusted return, showing a gap between early optimism and later results. Analysis of investor communication reveals that financial language and existing information influence these outcomes. There is a growing caution among frequent IPO investors, likely due to past experiences. Despite this, firms with initial high optimism continue to attract postlaunch interest, contradicting their long‐term underperformance.

Does voluntary environmental, social, and governance disclosure impact initial public offer withdrawal risk?

AbstractDespite much research now being published on Environmental, Social, and Governance (ESG) investments and Initial Public Offerings (IPOs) withdrawal risk, there appears to be a lack of evidence on the prospective IPO withdrawal risk associated with voluntary disclosure of ESG policies. This paper investigates the influence of ESG disclosure on IPO withdrawal by comparing voluntary ESG disclosure to conventional IPOs in the international market. A large data set is employed here, containing 33,535 failed and successful IPOs from 1995 to 2019 from several nations with their own legal systems, cultural norms, and economic systems. The findings reveal that voluntary disclosure of ESG practices does significantly reduce the likelihood of an IPO withdrawal, by as much as 48%. These findings strongly suggest that organizations engaged in ESG activities perceive voluntary disclosure as an incentive, to adhere to social expectations. Consequently, reducing the asymmetry of information between IPO participants minimizes the withdrawal risk these companies face, hence diminishing doubts about their legitimacy. The results have consequences for IPO businesses, investors, researchers, and regulators.

Offer Price and Post-IPO Ownership Structure

In an initial public offering (IPO) the firm can set the offer price of its shares, based on the valuation of the firm, by changing the number of shares. This study uses stock ownership records and hand-collected IPO data to analyze the offer prices, the underpricing of IPO shares (measured as the initial return, IR) and the relationship with the post-IPO ownership structure. Specifically, the paper focuses on individual IPO investors. The results show that for the lowest priced IPOs the IR is significantly higher priced IPOs. Furthermore, for the low-priced IPOs, there is a negative relationship between offer price and breadth of ownership. This implies that stocks with a low price can attract more investors than stocks with higher offer prices. However, for high-priced IPOs the relationship is positive, suggesting that also the IPOs with highest price attract more investors. Overall, this study shows that the offer price of an IPO firm may have a moderate effect on its post-IPO ownership structure.

The impact of prestigious attorneys on IPO withdrawal in the global primary market

This study aims to determine whether the involvement of prestigious attorneys in issuing companies affects withdrawals in the initial public offering (IPO) market. There is little evidence on how the involvement of famous lawyers affects IPO withdrawal. The study considers a large dataset consisting of 24,312 IPOs that were either successful or withdrawn from 22 distinct IPO marketplaces between January 1995 and December 2019. We find that IPO issuers may benefit from engaging with reputed attorneys by leveraging exceptional legal or negotiating abilities as quality certification signals to reduce IPO investors’ ex-ante uncertainty. Here, the objective is to protect their IPOs from withdrawal of at least by 22%. Multiple robustness tests validate the reliability of the results of this study. These findings have significant implications for researchers, legislators, investors, and issuers.

The signaling effect of entrepreneurship subsidies on initial public offering investor valuation: An anticorruption campaign as a quasi‐natural experiment

AbstractResearch SummaryThis study examines whether different entrepreneurship subsidies signal initial public offering (IPO) firms' quality to external investors. We employ a quasi‐natural experiment by exploiting the exogenous, staggered introduction of “Eight‐Point Code” inspections to Chinese provinces, which anticorruption campaign impacts how subsidies match firm quality. Based on a difference‐in‐differences analysis of 584 IPOs, we find that research and development (R&D) subsidies match highly innovative firms regardless of government corruption, but investors interpret R&D subsidies as a quality signal only when government corruption is low. High‐growth subsidies match high‐growth firms only when government corruption is low; however, investors do not interpret high‐growth subsidies as a quality signal regardless of government corruption. Our study contributes by examining subsidy–firm matching and investors' interpretations to isolate the signaling effect of entrepreneurship subsidies.Managerial SummaryDo initial public offering (IPO) investors interpret different entrepreneurship subsidies as signals of entrepreneurial firms' quality? We find that when government corruption is high, research and development (R&D) subsidies are matched to high‐quality firms, but high‐growth (HG) subsidies are not; nevertheless, because of dubious subsidy–firm matching under high corruption, neither R&D nor HG subsidies signal firm quality to IPO investors. When government corruption is low, both R&D and HG subsidies are matched to high‐quality firms; however, because of the distinct nature of innovation and growth, IPO investors interpret only R&D subsidies as a signal of quality, ignoring HG subsidies. Our findings suggest that investors' interpretations of entrepreneurship subsidies depend on subsidy type as well as subsidy–firm matching under different anticorruption regulations.

Retail Investor’s Investment Decision Criterion to Invest in IPOs - A Study

Initial Public Offering is a kind of public offering by the companies to generate the funds from primary market for the first time. Individual investors are becoming rational to investment in Initial Public Offerings (IPOs) to gain from the listing and hold for short or long term profits. They use different strategies to gain from the IPOs. The present study examines the retail investor’s criterion to invest in IPOs. For this purpose, a questionnaire was developed and administered to 724 sample respondents in Hyderabad and Secunderabad city. The responses are processed in SPSS - 26 version and applied few statistical tools i.e., descriptive statistics, ANOVA and Factor Analysis for interpretation of the results. The present study reveals that retail investor’s investment decision is based on the quota of equity shares available to retail investors in IPO, Equity Participation by Financial Institutions & Foreign Institutional Investors and followed by Price band. Further, the researcher founds that there is a significant variation in means among retail investors on Industry and Sector that Company Issues the IPO and Terms of Issue related to IPOs. The study concludes that, most of the investor’s investment decisions are based on market attractiveness and corporate image. Further the study may be useful to conduct the research in the following directions, to measure the investor’s perception and behavior towards in participation of IPOs, Factors affecting investment decision of retail investors in different geographical areas in India.

Empirical evidence of attribute framing: the case of unsophisticated IPO investors

PurposeThe purpose of this paper is to investigate the empirical relevance of attribute framing in the financial marketplace.Design/methodology/approachIncorporating a sample of German initial public offerings (IPOs) from 2010 to 2019, the author uses quantitative methods, including regression models and tests for the equality of means, to analyze whether unsophisticated investors are susceptible to attribute framing and whether this susceptibility reflects irrational behavior.FindingsUnsophisticated investors, who are typically retail investors, are susceptible to attribute framing. They are likely to subscribe to IPOs whose attribute “market valuation” is framed in a positive way, that is, IPOs with low offer prices. As low-priced IPOs are overvalued and underperform in the secondary market relative to high-priced IPOs, the susceptibility to attribute framing reflects irrational behavior. The findings are robust to controlling for sentiment.Research limitations/implicationsSince this paper includes a relatively small sample from a single stock market, future research might employ alternative approaches.Social implicationsWhen issuers and underwriters are able to exploit retail investors through attribute framing, the participation of these investors in the financial marketplace may finally decrease. Therefore, the financial literacy of retail investors needs to be improved.Originality/valueThis paper is the first to provide empirical evidence of attribute framing in a financial markets context. While most previous research on IPO offer prices focuses on US stocks, this paper is the first to incorporate German stocks.

Investment Decision Behaviour of Nepalese Investors in Initial Public Offerings

The main objective of this study is to explore the investment decision behaviour of Nepalese investors in Initial Public Offerings (IPOs). The study is qualitative in nature where semi-structured interviews are adopted to solicit an understanding of six young Nepalese investors on their investment decision. An understanding of how a specific individual in a specific setting makes meaning of a specific experience has been gained through the application of interpretative phenomenological analysis. The findings indicate investors are not influenced by psychological biases because they do not ‘herd’ on the information; rather it was found that they are influenced by overconfidence bias as investors overestimate their skills when investing. Moreover, this study has solely focused on IPO only, i.e., primary market, further qualitative research can be conducted on the secondary market to understand the financial setting and gain knowledge on how investors behave when investing in a riskier and more volatile market.

Analyzing the Relationship Between Psychological Biases and Initial Public Offerings Investment Decision-making in India

The study investigates the effect of psychological biases on investment decision-making in the financial market with particular reference to the initial public offerings (IPO) market in India. The research is conducted by administering a self-completion questionnaire to measure selected psychological biases. Using the structural equation modelling (SEM) technique of the multivariate analysis, the study analyzes a sample of 230 individual IPO investors and examines the effect of the selected psychological biases on the degree of irrationality in the market. The findings of the study reveal that investors are prone to availability and representativeness biases. This study suggests that an augmented understanding of fundamental psychological biases of human decision-making would help the Indian IPO market achieve a more significant level of market efficiency. The contribution of this research lies in its practical implications to the issuer of the issue, intermediaries and market regulators. JEL Classification: G11, G23, G41

The combined impact of IFRS mandatory adoption and institutional quality on the IPO companies’ underpricing

PurposeThis study aims to examine the impact of the International Financial Reporting Standards (IFRS) mandate and differences in national institutional quality on the underpricing of Initial Public Offering (IPO) companies.Design/methodology/approachMultiple Difference-in-Differences (DiD) ordinary least squares estimations were conducted for 100 corporations listed on the Saudi Arabian stock market using country-level institutional quality data from 2005 to 2017.FindingsIFRS requirements and improvements in institutional quality have a combined effect on minimizing IPO underpricing. The analysis of the combined impact of IFRS requirements and differences in transparency revealed that IPO vendors leave $5 on average for IPO investors to cash out post the IFRS mandate, compared to $29 previously. Thus, IFRS serves as a quality certification instrument that alleviates IPO investors’ ex ante uncertainties, even in nations with undeveloped institutions.Practical implicationsThe findings may be beneficial to researchers and policymakers. The results suggest that institutional quality enhancements and obligatory IFRS implementation highlight IFRS’s synergistic influence on the IPO market. While European harmonization efforts drove the adoption of IFRS in Europe in 2005, Saudi Arabia’s adoption of IFRS is not being driven by such initiatives (Daskeet al., 2008; Persakis and Iatridis 2017). In reality, when IFRS was officially imposed in Saudi Arabia in 2008, it, like many other emerging market nations, made considerable reforms to its formal institutions. However, research on the combined impact of IFRS and disparities in institutional quality in emerging IPO markets remains sparse. Emerging markets represent more than half of economies that use IFRS. Therefore, to the best of the authors’ knowledge, this study is the first to conduct an empirical investigation to identify this combined effect in emerging countries using the DiD analytical technique. Equity market legislators remain concerned regarding IPO underpricing, as it has a detrimental influence on economic growth (Bova and Pereira, 2012; Jamaani and Ahmed, 2021; Mehmoodet al., 2021). Depending on the degree of information asymmetry in national stock markets, underpricing costs increase the cost of going public for entrepreneurs. Consequently, prospective private firms are discouraged from accessing equity financing through the stock markets. This is likely to impede private sector development plans, causing a negative effect on economic growth.Originality/valueEmerging countries represent over 50% of the IFRS mandating economies. However, there is insufficient research on the combined effect of IFRS requirements and improvements in institutional quality in developing IPO markets. To the best of the authors’ knowledge, this study is the first empirical attempt to identify this combined effect in one of the largest developing countries. The results may aid academics and policymakers in better understanding the interaction between these two variables.

The Effects of Social Media Attention and Sentiment on Initial Public Offering Returns

Going public is a monumental step for many companies. Not only does it increase a company's legitimacy in the business community, but it also gives opportunities for them to harness significant amounts of investment capital. However, entrepreneurs and investors often face uncertainty due to the unpredictable nature of initial public offerings (IPOs). This study evaluated the impact of the amount and sentiment of Twitter activity on stock returns using data from domestic companies who went public from June 1, 2020 - May 31, 2021. Overall market behavior, company size, and community population demographics and social economic status of the companies' headquarters locations were controlled. The analyses showed that Twitter activity is associated with higher returns during relatively long-term time frames. The results are relevant for companies and potential IPO investors to predict and maximize their profits in the market. They also open opportunities for future research to investigate more in-depth regarding social factors in relation to IPOs.

A model of dynamic information production for initial public offerings

We develop a multi-period information-theoretic model of initial public offering (IPO) in the presence of an adverse selection problem that addresses both underpricing in an IPO and subsequent underperformance in the long run. In this model, information asymmetry exists among the owner of a firm going IPO, underwriter(s), informed analysts and uninformed investors. Information asymmetry between the owner and the investors is reduced through both the initial information production by some investors and the evaluations by informed analysts in the subsequent periods as new information arrives on the market. By incorporating future uncertainty, subsequent information revelation, certain firm-specific constraints and the actions of the agents, the optimal or sub-optimal actions of the agents are identified. The model explains why firms going public are underpriced at the IPO and, on average, underperform in the long run. The results are also compatible with social comparison explanations from a behavioral finance perspective.

The short- and long-lived effects of IFRS mandate on IPO firms in emerging market economies

PurposeThis study aims to examine the short- and long-lived effects of the International Financial Reporting Standards (IFRS) mandate on the quality of reporting information of initial public offering (IPO) firms in emerging market economies.Design/methodology/approachThe study used several difference-in-differences models for a sample comprising 102 Saudi Arabian IPO firms for 2003–2017.FindingsIt found that mandating the application of the IFRS had a significant short-lived but no long-lived effect on IPO firms’ information asymmetry. When information asymmetry was high such as in the primary market, the IFRS succeeded in alleviating the underpricing of IPO firms. Conversely, in the secondary market, with negligible information asymmetry, the IFRS was not beneficial for the long-term performance of companies in the IPO market.Originality/valueThis study is the first of its kind in the emerging market context and has important implications for IPO investors and analysts, IFRS-IPO researchers and policymakers in emerging economies. The results empirically confirmed that the IFRS mandate had solely a short-lived effect and no long-lasting impact, on the problem of asymmetric information in the IPO market. The effectiveness of the IFRS in producing quality financial reporting is contingent upon large-scale information asymmetry and vanishes when investors and analysts have abundant information about listed firms, even for emerging economies such as Saudi Arabia.

Market expectations and the impact of credit rating on the IPOs of U.S. banks

This study examines the impact of credit ratings on Initial Public Offerings (IPOs) for a sample of 336 U.S. banks. We report novel evidence in relation to the framework of An and Chan (2008) and Goergen et al. (2021). First, our empirical findings document that top management's decision of U.S. banks through to seek CRA evaluations turns out to be visible to potential IPO investors and contributes to a successful first trading day. Second, we confirm the relation between the existence of any credit rating (acquired from the three major U.S. agencies) and underpricing. Third, multiple credit ratings lead to lower underpricing than in the case of a single rating. Multiple credit ratings also contribute to reducing the filing price revisions. Finally, we report that in all cases, the credit rating that a rated U.S. bank IPO received after the completion of the public offering was higher than the last one received before the IPO.

Does aggressiveness help? Evidence from IPO corruption and pricing in China

Using a unique database of Chinese firms bribing initial public offering (IPO) regulators, we examine the impact of bribing on IPO pricing. Our findings suggest that bribing firms are younger, smaller, more volatile in their operating activities, and more generous in compensating underwriters and management. Most important, bribing firms price their IPO shares more aggressively than non-bribing firms and exhibit a higher price-to-earnings ratio, lower first-day return, and poorer post-IPO stock performance. Additional analyses suggest that both bribing and non-bribing firms exhibit negative announcement returns after the arrest of corrupt officials. However, the effect is stronger for bribing firms. Overall, bribing firms are systematically more aggressive than their non-bribing counterparts. They concede less to IPO investors and reward underwriters and management for helping them access the capital market.

Intended use of IPO proceeds and initial returns

Purpose This 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/approach A 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. Findings The 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/implications These 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/value This 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.

CEO education and the ability to raise capital

AbstractResearch Question/IssueUsing a unique hand‐collected dataset, this study examines the role of chief executive officer (CEO) educational attainments in relation to newly public firms.Theoretical/Academic ImplicationsUsing human capital, institutional and upper echelon theories, we hypothesize and demonstrate that CEO educational attainments do not unambiguously affect investors' perceptions of a firm's future prospects. Instead, their influence depends on the quality of CEO education as well as on the degree of uncertainty regarding the firm's future performance and the level of information asymmetry between issuers and prospective investors. To our knowledge, this is the first study that provides a comprehensive treatment of the role of CEO education in the IPO context.Research Findings/InsightsWe find that initial public offering (IPO) firms led by CEOs with superior educational credentials—in terms of level and quality—are associated with lower levels of IPO underpricing. This association is mainly driven by CEOs that hold advanced degrees. Notably, a difference‐in‐differences approach based on two quasi‐natural experiments indicates that the impact of CEO education on IPO underpricing is more pronounced within environments characterized by lower information transparency. The baseline results also hold in the longer term, thereby confirming the value of signaling prestigious academic awards at the time of the IPO.Practitioner/Policy ImplicationsOur evidence on the importance of CEO education, and especially that CEOs with varying levels and quality of educational training might differentially affect newly listed firms, is useful to providers of financial capital and boards of directors interested in assessing the viability of new ventures. The implication of our study for IPO investors is that it is worth paying more to take an equity position in firms run by better educated CEOs.

Impact of information on winners' curse and long run performance of initial public offerings

AbstractThe current research focuses on the short run and long run performance of initial public offerings (IPOs) during 2005–2012. The study evaluates the impact of informational variables (both internal and external) on the first day returns. The performances have been measured through market adjusted excess return (MAER) and buy and hold abnormal returns (BHAR). A structural equation model (SEM) has been designed to identify how information affects the short run performance of IPOs. The results reveal that new issues are underpriced thereby proving winners' curse hypothesis. The study highlights that the informational variables have a significant effect on first day returns. The results also indicate that the average long run returns are negative. The results of this study will assist global investors in decision making and will facilitate active participation of these investors in IPOs in emerging markets like India.

Innovations in financing: The impact of anchor investors in Indian IPOs

AbstractIn 2009, the Securities Exchange Board of India allowed qualified institutional investors to anchor initial public offerings (IPOs) by participating in the issue at a price and allocation publicly disclosed preceding the issue. We study anchor investors (AIs) in Indian IPOs during 2009–2017. We find the share allotment and the number of AIs separately have significant impacts on valuation and underpricing; however, the net effect is nonsignificant. Further, AIs significantly influence other institutional investors' participation in the IPO and induce lower aftermarket volatility. Overall, our evidence suggests that AIs boost demand for and mitigate ex ante information uncertainty of IPOs.