Initial Public Offerings Volume Research Articles

Fear of the COVID-19 pandemic and IPO aftermarket liquidity in ASEAN-5

PurposeThis study aims to examine the relationship between the fear index and initial public offering (IPO) aftermarket liquidity in ASEAN during the bearish time, the COVID-19 pandemic.Design/methodology/approachThis study uses random effect panel regression analysis using two proxies of IPO aftermarket liquidity, namely, volume and turnover, on data of 90 IPO companies in the ASEAN-5 countries over four study periods: 30, 60, 90 and 100 days, after their IPOs.FindingsThe results indicate that the COVID-19 fear index significantly affects liquidity for all periods. The fear index decreases the stock aftermarket liquidity of ASEAN-5 IPO companies. The findings are consistent with additional tests.Originality/valueThis study initiates research during the COVID-19 pandemic in ASEAN-5 countries. Furthermore, while the other studies examine the stock performance of existing listed companies, this study focuses exclusively on the liquidity of companies that went public through IPOs in 2020.

Underpricing of IPOs (Initial Public Offering) in Borsa Istanbul: The effect of Covid-19 Pandemic Period

Purpose- This research has both theoretical and practical implications. The study's findings will provide valuable insights into the impact of the COVID-19 pandemic on IPO mispricing in the Turkish IPO market. The study delves into the behavior of IPOs that were issued between 2010 and 2022, with a focus on how they were affected by the COVID-19 pandemic. The results may help investors and issuers understand the pandemic's effects on IPO pricing and inform their investment decisions. The study will also provide valuable insights to investors, regulators, and market participants, allowing them to make more informed decisions during market volatility and uncertainty periods. Methodology- The study involves employing two methods: the traditional ordinary least squares (OLS) and the more appropriate quantile regression (QR). The OLS method focuses on assessing the average impact of independent variables on mispricing, disregarding the unexplored latent characteristics of the mispricing distribution, especially when it deviates from a normal distribution. In contrast, the QR method allows us to investigate the diverse effects of independent variables at different levels of mispricing due to the asymmetric distribution of returns. By employing the QR approach, it can be identified the specific impacts of each variable on IPOs within particular levels of mispricing. This robust method is capable of handling potential heterogeneity in the distribution, which was observed in the sample. The QR method also facilitates the examination of various segments of the mispricing distribution, including the tail regions, enabling a comparison of the effects of explanatory factors on IPOs that range from extremely overpriced to extremely underpriced. Due to the constraints of the project, the paper has been done with a limited number of shares. Findings- The study investigates the impact of the COVID-19 pandemic on Initial Public Offering (IPO) mispricing in financial markets, examining changes in mispricing levels before, during, and after the pandemic. The results indicate a significant increase in IPO mispricing during the COVID-19 period, consistent with expectations due to factors such as heightened asymmetric information, reduced IPO volume, and decreased demand. The analysis tests the hypothesis that Covid-19 has a significant impact on IPO results. The results show that the null hypothesis (H0) cannot be rejected, supporting the notion that the pandemic has a substantial effect on IPO mispricing. This is particularly evident in equations examining 1-year returns. Furthermore, the study explores the influence of various factors on IPO mispricing, including stock market indices and dummy variables representing different years. While some index values are found to be insignificant, the Borsa Istanbul-All Index and dummy variables for 2020, 2021, and 2022 are significant in specific equations. Notably, the persistence of the impact of COVID-19 beyond the relevant period suggests a lasting effect on IPO mispricing. Examining sector-specific effects, the study finds that, based on first-day returns, all sector values, except for SEC 3 (Consumer Non-Cyclicals), are significant. However, for 1-year returns, only SEC 5 (Financials) and SEC 4 (Energy) exhibit significance, with the latter being slightly above the 10% limit. The increasing demand for energy companies in recent times is identified as a potential driver for higher levels of "IPO underpricing" in specific IPOs within these sectors. Conclusion- The study provides robust evidence of increased IPO mispricing during the COVID-19 pandemic, highlighting the persistent impact of the crisis on financial markets, as well as sector-specific nuances influencing mispricing levels. Keywords: IPOs (Initial Public Offerings), mispricing, pandemic, initial returns, long-term returns JEL Codes: C21, C23, D81, E44, G14

A new Markov regime‐switching count time series approach for forecasting initial public offering volumes and detecting issue cycles

AbstractThis study proposes a novel Markov regime‐switching negative binomial generalized autoregressive conditional heteroskedasticity model for analyzing count data time series. We develop a likelihood‐based method for parameter estimation and give the one‐step‐ahead forecasting algorithms for the mean, variance, and quantiles. An empirical analysis of both the U.S. initial public offering (IPO) and Chinese A‐share IPO markets indicates that our method is very efficient in forecasting monthly IPO volumes and detecting hot/cold issue markets. The first‐day IPO return is positively correlated with the IPO volume in a hot issue market but negatively correlated with the IPO volume in a cold issue market, in both the U.S. and Chinese IPO markets. However, the average first‐day return in the previous hot issue market has a significant positive impact on the current IPO volume for only the U.S. IPO market. Our approach helps to more accurately model and understand the behavior of hot/cold IPO issue markets.

Relationship between prestige signals and over-subscription ratio

PurposeThe purpose of this paper is to examine whether initial public offering (IPO) over-subscription is a function of firm’s prestige signals conveyed by third parties with reputational capital such as underwriter, auditor and independent non-executive board member.Design/methodology/approachThe relationship between prestige signals and over-subscription ratio (OSR) of IPOs is analysed using a cross-sectional regression based on a sample of 393 IPOs issued between January 2000 and December 2015.FindingsThe results indicate that IPOs underwritten by reputable underwriters have lower OSR than those underwritten by non-reputable underwriters. While issuer engages reputable underwriter to certify firm quality to reduce information asymmetry, the action brings with it lower initial returns for its IPO. Investors interpret the signal conveyed by issuer’s choice of underwriter from under-pricing perspective and respond accordingly by reducing IPO demand. This implies that investors regard under-pricing as a more valuable signal than firm quality signal associated with underwriter reputation. The findings also indicate that over-subscription increases in IPOs that have above average initial returns and higher institutional participation. Issuing firms that go public in a period of high IPO volume are associated with low OSR.Originality/valueThis is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.

Investor sentiment: Does it augment the performance of asset pricing models?

This paper examines whether incorporating various investor sentiment measures in conditional asset pricing models can help to capture the impact of size, value, liquidity, and momentum effects on risk-adjusted returns of U.S. individual stocks. Using monthly data for the period January 1980 to December 2014, we determine the significance of equity fund flow, initial public offering (IPO) first day returns, IPO volume, closed-end fund discount, equity put-call ratio, dividend premium, change in margin debt, and sentiment index, by including them as conditioning information in asset pricing models. Our results show that sentiment augmented asset pricing models significantly capture the impacts of size, value, liquidity, and momentum effects on risk-adjusted returns. In particular, we observe that conditioning beta on equity fund flow, IPO first day return, and put-call ratio capture the predictive power of equity characteristics for all the asset pricing models.

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.

Modeling short‐term post‐offering price–volume relationships using Bayesian change‐point panel quantile regression

We propose a special panel quantile regression model with multiple stochastic change‐points to analyze latent structural breaks in the short‐term post‐offering price–volume relationships in China's growth enterprise market where the piecewise quantile equations are defined by change point indication functions. We also develop a new Bayesian inference and Markov chain Monte Carlo simulation approach to estimate the parameters, including the locations of change points, and put forth simulation‐based posterior Bayesian factor tests to find the best number of change points. Our empirical evidence suggests that the single change point effect is significant on quantile‐based price–volume relationships in China's growth enterprise market. The lagged initial public offering (IPO) return and the IPO volume rate of change have positive impacts on the current IPO return before and after the change point. Along with investors' gradually declining hot sentiment toward a new IPO, the market index volume rate of change induces the abnormal short‐term post‐offering IPO return to move back to the equilibrium. Copyright © 2015 John Wiley & Sons, Ltd.

The JOBS Act and IPO volume: Evidence that disclosure costs affect the IPO decision

In April 2012, the Jumpstart Our Business Startups Act (JOBS Act) was enacted to help revitalize the initial public offering (IPO) market, especially for small firms. During the year ending March 2014, IPO volume and the proportion of small firm issuers was the largest since 2000. Controlling for market conditions, we estimate that the JOBS Act has led to 21 additional IPOs annually, a 25% increase over pre-JOBS levels. Firms with high proprietary disclosure costs, such as biotechnology and pharmaceutical firms, increase IPO activity the most. These firms are also more likely to take advantage of the act׳s de-risking provisions, allowing firms to file the IPO confidentially while testing-the-waters.

A Review Of The Determinants Of Long Run Share Price And Operating Performance Of Initial Public Offerings On The Johannesburg Stock Exchange

This paper provides some new evidence on the determinants of long run operating and share price performance of Initial Public Offerings (IPO) on the Johannesburg Stock Exchange (JSE). It has been hypothesised that the information contained in the pre listing documents could shed some light on the aftermarket performance of South African IPO shares. In line with previous literature, South African IPO shares significantly underperformed the market on average. Additionally, there is a statistically significant negative relationship between IPO Volume and long run performance, suggesting that the South African IPO market may be subject to the fads and over optimism theory of Ritter (1991). The overoptimism hypothesis is further cemented by a negative correlation between pre IPO revenue forecast and aftermarket operating performance. Listing expenses play a moderate role in the reduction of the aftermarket performance of IPOs on the JSE. However, it appears that international investment banks have a positive influence on the aftermarket performance of IPOs on the JSE. Likewise, firms audited by the BIG 4 audit firms tend to perform well in terms of aftermarket buy and hold returns. Large firms at the time of listing tend to perform well and firms with high growth prospects at the time of listing generate a negative and significant return on their investment in total assets. Although the contingent liabilities disclosed in the prelisting reports negatively influence most of the measurers of aftermarket performance, the relationship is, by and large, insignificant.

Economies of Scope and IPO Activity in Europe

Initial public offering (IPO) activity in Europe has recently come to a near-halt and, similarly to the US, this decline has been more pronounced among small firm IPOs. Three alternative explanations have been proposed: the economies of scope hypothesis states that getting big fast has become more important, resulting in small firms being acquired; the regulatory overreach hypothesis, which states that small firms are remaining private due to an increase in the regulatory costs borne by publicly traded firms; and the market conditions hypothesis, which states that poor stock market levels have resulted in low IPO volume. Although Europe is characterized by more fragmented regulation and by the existence of second markets with lower compliance costs, we argue that the decline in the number of IPOs is partly attributable to the economies of scope explanation. The Panic of 2008 and the Eurozone crisis of 2011 have also temporarily depressed IPO volume, consistent with the market conditions hypothesis. We present evidence of an increased difficulty for small firms to remain profitable, their underperformance, and their higher propensity to be acquired soon after the IPO, relative to large firms. We document that these patterns persist even among second market IPOs, where the regulatory overreach hypothesis does not apply. Controlling for the impact of market valuations, we investigate IPO activity in a time-series setting and unveil a downward trend in European IPOs over time.

Equilibrium in the Initial Public Offerings Market

In this review, I criticize the ability of popular asymmetric information-based models to explain the magnitude of the underpricing of initial public offerings (IPOs) that is observed. I suggest that the quantitative magnitude of underpricing can be explained with a market structure in which underwriters want to underprice excessively, issuers are focused on services bundled with underwriting rather than on maximizing the offer proceeds, and there is limited competition between underwriters. Since the technology bubble burst in 2000, U.S. IPO volume has been low. Although regulatory burdens undoubtedly account for some of the decline, I suggest that much of the decline may be due to a structural shift that has lessened the profitability of small independent companies relative to their value as part of a larger, more established organization that can realize economies of scope. I also discuss the long-run performance literature. My interpretation of the evidence is that except for the smallest companies going public, IPOs have long-run returns that are similar to those on seasoned stocks with the same characteristics.

Equilibrium in the IPO Market

In this survey, I criticize the ability of popular asymmetric information-based models to explain the magnitude of the underpricing of initial public offerings (IPOs) that is observed. I suggest that the quantitative magnitude of underpricing can be explained with a market structure in which underwriters want to underprice excessively, issuers are focused on services bundled with underwriting rather than on maximizing the offer proceeds, and there is limited competition between underwriters. Since the technology bubble burst in 2000, U.S. IPO volume has been low. Although regulatory burdens undoubtedly account for some of the decline, I suggest that much of the decline may be due to a structural shift that has lessened the profitability of small independent companies relative to their value as part of a larger, more established organization that can realize economies of scope. I also discuss the long-run performance literature. My interpretation of the evidence is that except for the smallest companies going public, IPOs have long-run returns that are similar to those on seasoned stocks with the same characteristics.

The determinants of market-wide issue cycles for initial public offerings

This paper identifies the determinants of market-wide issue cycles for initial public offerings (IPOs) using an autoregressive conditional count model. We consider whether IPO volume is related to business conditions, investor sentiment, and time variation in adverse selection costs caused by asymmetric information between managers and investors. We provide evidence indicating that time variation in business conditions and investor sentiment are important determinants of monthly issue activity. By contrast, time variation in adverse selection costs does not significantly affect IPO volume.

Post-issue operating performance of firms listing on the JSE

Various studies conducted in the United States (US) have documented several anomalies with initial public offerings (IPOs). Ibbotson (1975) and Ritter (1984, 1991) document short-run underpricing, cyclical hot issue markets and long-run underperformance. These findings are not peculiar to the US. Long run IPO underperformance is documented in the United Kingdom (UK) (Levis, 1993), and Brazil (Aggarwal, Leal and Hernandez, 1993). In South Africa research on IPO performance on the Johannesburg Securities Exchange (JSE) has produced mixed results (Lawson, 1996 and M'kombe and Ward, 2002). These contradictory findings indicate that the long run performance of IPOs varies over time and long-run returns are sensitive to the sample period and methodology used (Ritter and Welch, 2002 and Brav, 2000). This study examines the change in operating performance of 391 firms that listed on the JSE between 1990 and 2003. Using a fixed-effects panel data regression model, factors such as the changes in profitability, investment and growth, tax, leverage and cost of credit are examined over a three year period. Profitability of IPO firms declines significantly in the third year after listing. In addition, tax payments increase permanently and significantly. These results are consistent with findings by Pagano, Panetta and Zingales (1998) and Jain and Kini (1994). Moreover, they are also consistent with M'kombe and Ward (2002)'s results of long-run underperformance of South African IPOs and Ritter (1991) and Loughran and Ritter (1995)'s discovery of long-run IPO underperformance in the US. Similar to Ritter's (1991) results, IPO volume in the South African market fluctuates. The highest concentration of IPOs occurred during the technology fuelled bull market of 1998 and 1999 whereas the lowest concentration occurred during the global recession of 2001 to 2003.

Good IPOs drive in bad: Inelastic banking capacity and persistently large underpricing in hot IPO markets

AbstractIn this paper, we consider the effect of labor market constraints on the InitialPublic Offering (IPO) activity of investment banks. We posit that identifying IPOquality requires specialized screening labor that takes time to train. Positive shocksto economy’s production frontier stimulate IPO demand. At this higher level ofdemand, screening labor costs must rise to clear the labor market. This resultsin underwriters optimally reducing screening quality, in the process encouragingfirms with sub-marginal projects to also apply, further straining the screening labormarket. In equilibrium, underpricing can be quite significant both because of lowerquality screening and because of its role in lowering the quality of the applicantpool. Our model’s predictions are consistent with empirical results such as positivecorrelation between IPO volume and underpricing, reduced information search perproject during hot markets, and the persistence of high IPO volume in the face ofincreased underpricing.

IPO Pricing and the Relative Importance of Investor Sentiment - Evidence from Germany

The underpricing phenomenon of Initial Public Offerings (IPOs) has been widely studied across different stock markets around the world and has often been explained to be as a result of asymmetrically distributed information and ex-ante uncertainty. However, as Ritter and Welch (2002) argue to the contrary, these theories are unlikely to explain the persistent pattern of high initial returns during the first trading day as well as other features of the returns data. This paper add some further alternative explanations to the traditional theory while focusing on German IPOs during the 1997 to 2001 period and covering a sample of 410 firms. Using time series regressions the cyclical behaviour of the issue activity is examined and we report, using VAR analysis, that lagged underpricing and IPO volume influence the decision to go public. The cross-sectional regression analysis, using both censored and uncensored data, shows that the initial returns are mainly influenced by investor sentiment and demand, and less by ex-ante uncertainty, especially during the dot-com boom.

HIGH‐TECH IPOS: A TALE OF TWO CONTINENTS

The typical price behavior of an initial public offering (IPO), consisting of a price upsurge on the first trading day followed by subpar performance in the (longer‐run) after‐market, is one of the most intriguing puzzles in corporate finance. This study focuses on high‐tech IPOs in Europe and the U.S. over the period 1998–2001, both to compare the European and U.S. IPO markets and to determine how the price behavior of high‐tech IPOs compares to that of IPOs in general. Average initial‐day returns were 39% and 64% for the European and U.S. samples, respectively. The median returns were significantly lower, however, indicating that the sample averages are affected by a small group of exceptionally strong performers. But, for the first full year of trading, the median market‐adjusted returns were negative for both samples. Not surprisingly, this substandard aftermarket performance was most apparent in companies that failed to generate operating profits.As with IPOs in general, high‐tech IPOs showed higher initial‐day returns in “hot” markets than in “cold.” Strong first‐day performance was a good predictor of IPO volume in the high‐tech market, with strong first‐day returns triggering a flood of IPOs in subsequent months. Overall, then, the authors' study concludes that the price behavior of high‐tech IPOs provides an exaggerated version of the general tendency of IPOs to be underpriced initially but underperform over the longer term.

IPO Market Cycles: Bubbles or Sequential Learning?

We examine the strong cycles in the number of initial public offerings (IPOs) and in the average initial returns realized by investors who participated in the IPOs. At the aggregate level, initial returns are predictably related to past initial returns and also to future IPO volume from 1960-1997. To understand these patterns, we use firm-level data from 1985-97 to model the initial return. Our results show that aggregate IPO cycles occur because of the time it takes to complete an IPO, the clustering of similar types of IPOs in time, and information spillovers among IPOs.