Pricing Of Initial Public Offerings Research Articles

IPO Pricing in Germany and Switzerland in the New Millennium: Tests on Underpricing and Long-Term Performance

We provide an updated analysis of initial public offerings (IPOs) by Swiss and German companies after the turn of the millennium up to 2020. We compare the characteristics of initial pricing to those observed in prior studies, test conventional hypotheses about underpricing cross-sectionally, and analyze the long-run performance of IPO firms. Our sample included 72 IPOs in Switzerland and 307 IPOs in Germany. We found an average (median) underpricing of 13.27% (7.19%) for Swiss IPOs and an average (median) of 21.50% (3.7%) for German IPOs; the averages dropped to 6.45% and 5.82%, respectively, after excluding the hot-issue market in 2000. Among the cross-sectional explanations, interesting effects can be observed with respect to the bookbuilding width and transparency standard of the listed market segment, as well as the reputation of the underwriter and the value of the greenshoe option. We documented strong post-issue underperformance for holding periods up to 120 months, which were, however, only present in the Swiss sample for median, not mean, returns.

An Introspection into IPO Pricing and Post-listing Performance of Indian Fintech Companies

The study examines the extent of initial public offering (IPO) underpricing of the Fintech companies and compares the same with the non-Fintech companies. The study also conducts post-listing performance of Fintech companies using listing gains, profitability margin, and valuation multiple over 3 years. The overall study, which spans from 2007 to 2022, indicates that the extent of IPO underpricing of Fintech companies is marginally higher than that of the non-Fintech companies. The results reveal that investors suffered a drip in the listing gains during the post-listing period. Further, during the post-listing phase, the Fintech companies have been able to post a continuous profit and also could sustain with a steady valuation multiple. The findings of the study postulate that the Fintech companies need to focus on implementing the right strategies to reduce the uncertainty and discontent among the investing community. Thus, the companies need to look forward to building up investor confidence in the upcoming days with improved performance. The significant implication of the study brings out that the policymakers need to contemplate framing norms for eradicating discontent and instilling confidence in the investors toward the Fintech companies over a longer time horizon of the primary market investment.

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.

IPO Pricing Theory and Mechanism under the Registration System

When a firm makes an initial public offering (IPO) and qualifies for listing, it negotiates and determines a price with its underwriters for the public sale of its shares to specific or non-specific investors. This paper elaborates the theory of IPO price suppression through literature review and analysis, and also summarizes the IPO pricing mechanism. It helps to provide guidelines for the study of IPO pricing in China under the registration system environment and assists the regulators to further improve the relevant regulations.

UNDERPRICING OF IPOS (INITIAL PUBLIC OFFERING) IN BORSA ISTANBUL: THE EFFECT OF COVID-19 PANDEMIC PERIOD

Purpose- The research investigates the impact of the COVID-19 pandemic on Initial Public Offering (IPO) mispricing in the Turkish IPO market from 2010 to 2022. The study aims to offer valuable insights into the behavior of IPOs during this period, aiding investors and issuers in understanding the effects of the pandemic on IPO pricing. The findings may empower stakeholders, including investors, regulators, and market participants, to make more informed decisions in times of market volatility and uncertainty. Methodology- The study utilizes two methods, ordinary least squares (OLS) and quantile regression (QR), to analyze the impact of independent variables on IPO mispricing. OLS focuses on average effects, overlooking nuances in mispricing distribution. In contrast, QR allows the exploration of variable effects at different mispricing levels, accommodating the asymmetric distribution of returns. Employing QR helps identify specific impacts of variables on IPOs within distinct mispricing levels, addressing distribution heterogeneity observed in the sample. This robust approach enhances the study's ability to capture a more comprehensive understanding of the relationship between independent variables and IPO mispricing. Findings- The study reveals a substantial increase in IPO mispricing during the COVID-19 period, attributed to factors like heightened asymmetric information, reduced IPO volume, and decreased demand. Notably, the impact extends beyond the pandemic period, indicating a lasting effect on IPO mispricing. Sector-specific effects are observed, with all sectors, except Consumer Non-Cyclicals, showing significance in first-day returns. However, for 1-year returns, only the Finance and Energy sectors exhibit significance, with the latter slightly exceeding the 10% limit. 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.

The power of prediction with Google searches and social media posts: Retail investor interest and IPO pricing

This paper investigates the association between retail investors’ online activity and the pricing of initial public offerings (IPOs). We utilize data from Google Trends and StockTwits to analyze price revision for 901 U.S. IPOs, and find that the online search count, social media post count, and post sentiment are positively associated with IPO pricing. One-standard-deviation increases in these variables correspond to price revision increases of 9.02 %, 50.73 %, and 70.22 %, respectively. Additionally, online search plays a more significant role in influencing IPO price revision when social media discussions about a specific IPO exhibit higher sentiment inequality among participants.

Pricing and performance of initial public offerings: directions for future research

Purpose This study aims to outline the research field of initial public offerings (IPOs) pricing and performance by combining bibliometric analysis with a systematic literature review process. Design/methodology/approach The study uses over three decades of IPO publication records (1989–2020) from Scopus and Web of Science databases. An analysis of keyword co-occurrence and bibliometric coupling was used to gain insights into the evolution of IPO literature. Findings The study categorized the IPO research field into four primary clusters: IPO pricing and short-run behaviour, IPO performance and influence of intermediaries, venture capital financing and top management and political affiliations and litigation risks. The results offer a framework for delineating research advancements at different stages of IPOs and illustrate the growing interest of researchers in IPOs in recent years. The study identified future research potential in the areas of corporate governance, earning management and investor sentiments related to IPO performance. Similarly, the study highlighted the opportunity to test multiple theoretical frameworks on alternative investment platforms (SME IPO platforms) operating under distinct regulatory environments. Originality/value To the best of the authors’ knowledge, this paper represents the first instance of using both bibliometric and systematic review to quantitatively and qualitatively review the articles published in the area of IPO pricing and performance from 1989 to 2020.

How does corporate culture affect IPO price formation?

We examine the relationship between corporate culture and initial public offering (IPO) price formation. Using a sample of 935 US IPOs and data on corporate culture from Li et al. (2021b), we find that IPOs of strong culture firms are associated with more positive price revisions and higher initial returns, i.e., more underpricing. These findings hold using an alternative measure of corporate culture, matched samples, and a large set of control variables. Consistent with key theories, the effects appear to be driven by underwriters deliberately compensating investors for revealing information about their perceptions of the firm's culture during bookbuilding.

Sponsor Co-investment, inquiry divergence, and IPO pricing efficiency

This paper measures the initial public offering (IPO) pricing efficiency of China's Sci-Tech Innovation Board and the growth enterprise market under the registration-based IPO system, with a novel focus on the mandatory sponsor co-investment system. Our findings reveal that this system improves IPO pricing efficiency and is crucial in mitigating capital constraints, overshadowing the influence of sponsor reputation. Additionally, the co-investment ratio reduces inquiry divergence among institutional investors, enhancing pricing efficiency. This study provides new insights into China's evolving IPO market dynamics and its regulatory mechanisms.

A Research on IPO Pricing Efficiency under the Approval System and Registration System

This article examines China’s evolving stock issuance system within its market-oriented economy, particularly focusing on the transition from the approval system to the registration system. The study evaluates the efficiency of Initial Public Offering (IPO) pricing under incomplete games, identifying high risks and uncertainties in the process. By analyzing 31 selected articles, the research categorizes IPO pricing efficiency based on the timeline of system transformation and explores three key influencing factors: macro-environmental factors, information factors, and role behavioral factors. The findings reveal minimal differences in the study of IPO pricing efficiency under different time intervals in the Chinese capital market. Moreover, the shift from the approval system to the registration system has positively impacted information disclosure, transmission speed, freedom, and individual responsibility in China’s capital market. The article concludes with a summary of the organized content and suggests future research directions, emphasizing the importance of continuous guidance and optimization for resource allocation in China’s capital market to foster healthy and stable development.

The pre-IPO dividend and IPO underpricing: Evidence from China

More than one in five listed firms in China pay cash dividends during the year right before their initial public offerings (IPOs). This paper examines the association between pre-IPO dividend payment and IPO pricing using manually collected Chinese data from 2006 to 2019. We find that firms initiating pre-IPO dividends tend to have lower IPO underpricing than non-initiating firms. We also find that the effect of pre-IPO dividend initiation on IPO underpricing is more pronounced for firms with greater pre-IPO growth and profitability. Additional analyses indicate that initiating firms have better pre- and post-IPO operating performance and post-IPO stock performance. Moreover, initiating firms pay more dividends and attract significantly higher post-IPO investor attention. Collectively, the pre-IPO dividend initiation is not a short-term strategic behaviour of low-quality firms, but aims to send positive signals and improve investors' stock valuation.

Informasi Prospektus dalam Penetapan Harga IPO

This study aims to analyze the effect of shariah-compliant status, institutional investor involvement and shareholder retention on IPO prices in concumer cyclicals and non-cyclicals companies conducting Initial Public Offerings (IPOs) listed on the Indonesia Stock Exchange in 2007-2021, with control variables underwriter reputation, leverage and profitability. From the results of testing the hypothesis using multiple regression analysis of the STATA 17 program, it was found that shariah compliant-status had no significant positive effect on IPO prices, institutional investor involvement had no significant positive effect on IPO prices, and shareholder retention had a significant positive effect on IPO prices. Maenwhile, the control variable underwriter’s reputation has a significant positive effect on the IPO price, leverage has a insignificant positive effect on the IPO priceand profitability has an insignificant positive effect on the IPO price.

IPO suspension, financing uncertainty and corporate tax avoidance

The acquisition of external financing is an important factor affecting the development of enterprises and even the economic growth of a country. However, changes in the external environment often expose enterprises to uncertainties in obtaining external financing. Taking China’s initial public offering (IPO) suspension policy as a setting, this paper examines the impact of the associated external financing uncertainty on firms. The empirical results show that firms that are unable to secure planned financing due to the IPO suspension policy engage in greater tax avoidance activities than successful IPOs during the IPO suspension period; this phenomenon is mainly concentrated in firms that are not state-owned, have no venture capital or private equity backing, have lower debt servicing capacity and have lower tax avoidance risk. Moreover, the tax avoidance activities of enterprises positively influence their fixed asset investment and innovation investment during the IPO suspension period. Evidence based on IPO price performance indicates that investors respond positively to firms’ tax avoidance practices during IPO suspensions.

Social capital and the pricing of initial public offerings

Using a large sample of 4,892 IPOs in the United States, we establish that the level of social capital in the county of the IPO firm's headquarters is negatively associated with the level of IPO underpricing. The results hold for a range of robustness tests, including those addressing endogeneity. Additionally, the relation between social capital and IPO underpricing is weaker among IPO firms with less information uncertainty and stronger for IPO firms with more agency problems. We also show that social capital affects IPO underpricing through changing IPO firms’ earnings management activities. Further, high social capital is associated with a higher likelihood of the IPO being oversubscribed, higher total proceeds raised in the IPO, a greater number of IPO shares issued, and lower total IPO administrative fees. Social capital also influences seasoned equity offerings (SEOs), in the form of lowering SEO underpricing and SEO discount. Overall, our results demonstrate the importance of social capital as an informal contracting mechanism in enhancing the pricing and performance of firm securities issuance.

Timeliness of technological innovation and decisions of IPO timing and pricing

This study builds a theoretical model, empirically testing the impact of timeliness value of technological innovation on initial public offering (IPO) timing and underpricing based on Chinese IPO. And a posteriori study is conducted from the two perspectives of growth value and competitive value in the product market after IPO. The results are as follows: (1) The greater the timeliness value of technological innovation, the more likely firms will go public early.(2) When firms go public early, the timeliness value of technological innovation will affect the ceiling of IPO underpricing that firms can bear, which means that the timeliness value of technological innovation is positively correlated with the degree of underpricing. (3) For firms that go public early with high IPO underpricing, the timeliness of technological innovation has a greater positive effect on the growth performance and competitiveness in the product market after IPO. Therefore, timeliness of technological innovation is more likely to be involved in firms’ decisions of going public early with high underpricing.

Do media connections help? Evidence from IPO pricing in China

This study examines how social connections between media executives and firms affect initial public offering (IPO) pricing using manually collected Chinese data. We find media-connected firms receive more frequent and more positive coverage than their unconnected peers, resulting in reduced IPO underpricing. However, media-connected firms have worse post-IPO market performance. Although media-connected firms have better pre-IPO accounting performance, they conduct more earnings management under the cover provided by their connected media. Additional results show that the negative effect of media connections on IPO underpricing is more pronounced for media that are not controlled by the central government and are based in the same city as the firm. It is also more pronounced for firms with less institutional ownership and non-state-owned enterprises. Our results remain valid after various robustness tests, such as alternative proxies for IPO underpricing, eliminating alternative hypotheses, matching analysis, instrumental variable analysis, as well as placebo tests. Collectively, our findings suggest that media connections compromise IPO pricing efficiency.

Deliberate underpricing and after-market mispricing in Indian IPO market: Stochastic frontier approach

Purpose This paper aims to study the underpricing phenomenon of initial public offerings (IPOs) of 355 Indian companies issued from 2007 to 2019. The research question this paper empirically examines is whether Indian corporate executives deliberately underprice IPOs from its fair value to attract investors, thereby causing an abnormal spike in the prices on the listing day. The findings of this study challenge a commonly held notion of leaving money on the table by IPO issuing companies. Of the overall average listing day returns of 17%, the deliberate premarket underpricing component is found to be mere 5.3%, while the remaining price fluctuation is, inter alia, a result of market momentum along with the unmet demands of impatient investors. Design/methodology/approach Following Koop and Li (2001), this study uses Stochastic frontier model (SFM) to study a routine anomaly of disparity between the primary market price (i.e. IPO issue price) and the secondary market price (listing price). The jump in the issue price observed on a listing day is decomposed into deliberate premarket underpricing component that reflects the extent of managerial manipulation and the after-market misvaluation component attributable to information asymmetry and prevailing market volatility. Findings This paper uses SFM to bifurcate initial returns into deliberate underpricing by managers and after-market mispricing by noise traders. This study finds that a significant part of the initial return is explained through after-market mispricing. This study finds that average initial returns are 17%, deliberate premarket underpricing is 5.3% and after-market mispricing averages 11.9%. Research limitations/implications This study can isolate underpricing done at the premarket by estimating a systematic one-sided error term that measures the maximum predicted issue price deviation from the offered price. Consequentially, the disaggregation of initial returns may be especially informative for retail investors in planning their exit strategy from an IPO by separating the strength of the firm's fundamentals and its causal relationship with the initial returns. Substantial proportion of after-market mispricing implies that future research should focus on factors causing after-market mispricing. As underlying causes are identified, tailor-made policy responses can be formulated to benefit investors. Practical implications This paper has empirically validated that initial return is a mix of both components, i.e. deliberate underpricing and aftermarket mispricing. This disaggregation of initial returns can prove helpful for investors in planning their exit strategy. This study can help investors to become more aware of the importance of the fundamentals of the firm and its causal relation with the initial returns. This information in turn can help reduce the information asymmetry amongst investors and help them lessen the costs of adverse selection. Originality/value A large number of research studies on IPO pricing find overwhelming evidence of underpricing in public issues. This research attempts to decompose the extent of underpricing into deliberate underpricing and after-market mispricing, thereby supplementing the existing literature on the IPO pricing puzzle. To the best of the authors’ knowledge, this study is the first contribution to the literature on initial return decomposition for the Indian capital markets.

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

Optimism, divergence of investors’ opinions, and the long-run underperformance of IPOs

The long-run underperformance of initial public offerings (IPOs) suggests that aftermarket prices are overvalued. According to the theory of heterogeneous beliefs and short-sale constraints, the aftermarket price of IPOs is overvalued; in addition, their performance deteriorates when the mean level of optimism and degree of divergence of investors’ opinions increase. I examine this phenomenon by estimating the mean and divergence of investor opinion distribution by focusing on Japanese auction-method IPOs. According to the results, both optimism and divergence cause the overvaluation of IPO’s first-day market price; however, only the mean level of optimism is statistically significant in explaining post-IPO underperformance.

Initial Public Offerings Chinese Style

AbstractThis article provides a survey of China’s initial public offering (IPO) market, focusing on IPO pricing, bids and allocation, and aftermarket trading. We show that strict regulations result in suppressed IPO offer prices and high initial returns, causing a high cost of going public. Investors treat IPOs as lotteries with extremely high short-term returns, with little attention to the long term. The auction selling method, however, works in the way it is supposed to. Mutual funds bid in a more informative way than other investors, and their advantages are unlikely to be due to underwriters’ preferential treatment. We also discuss the latest registration-system reform.