Pricing Of Initial Public Offerings Research Articles

IPOs in Indian Stock Market: Analyzing Pricing and Performance of IPO Listed in 2021

The covid-19 pandemic has had unprecedented effects on the world economy. All countries, including India, have gone through this crisis. The coronavirus reported in India in March 2020 has spread across the nation, affecting all industries. Like other sectors of the economy, the pandemic has adversely affected the Indian stock market. In March 2021, the value of the Nifty and Sensex, two important indices, fell from 12000 points to 8000 points and 32000 points to 17000 points, respectively. The initial wave continued till the end of the year. However, 2021 has been a bumper year for the stock market, with businesses generating $1.2 trillion through Initial Public Offering (IPOs). The year started with an IPO and ended with one, and sixty-six IPOs were listed on the Indian stock exchange despite the adverse environment. It is more than twice as many as the previous year. Some IPOs received more public attention and could not perform as expected. This study aims to examine the performance of IPOs on the day of listing and their current status. The findings of this study will help those new to the field of trading and researchers to understand the process of IPO listing and its working.

Performance analysis of post-pandemic initial public offering's

The process through which an unlisted company can become a listed one by selling its shares to the general public is known as an initial public offering (IPO). Companies are using an IPO to raise capital by issuing its new shares to the public. Primary market is where new securities are first offered for sale and after its listing, shares can be traded over secondary market. IPO’s can be a golden opportunity for the companies planning to expand and diversify their business, from the perspective of investors IPO’s can be a good source of earning higher dividends and long-term capital appreciation. Since COVID-19 pandemic, which created a devastated impact on the almost all the sectors of our economy, IPO’s during this period suffered a lot. Some companies struggled to get a right price for their IPO’s, while for some it was overpriced. Therefore, it can be assumed, COVID-19 pandemic has a significant impact on the performance of IPO’s especially from the context of Indian stock market. The study attempts to analyse the pricing of IPO’s and the value of share premium on listing day. Further the study evaluates the current and progressive performance of IPOs on the base of its listing status. The study analysis 27 newly listed IPOs in the post pandemic period of six months from the date of issue i.e., October 2021 to March 2022. The study found 19 companies have under-priced shares, while 8 companies have overpriced. Out of 27 IPO’s, 15 IPO’s have generated positive returns and performed well throughout the study period, 10 IPO’s have given negative returns and 2 IPO’s have shown volatility at each month but generated positive returns overall. Furthermore, the study observes that majority of the IPOs issued during post pandemic period has performed well. The study would help investors in increasing their understanding towards IPO’s and to take necessary precautions while selecting the IPOs into their portfolio.

Decrypting IPO pricing: an integrated bibliometric and content analysis approach

PurposeSince 2018, there has been a resurgence in initial public offering (IPO) pricing studies. The authors aim to consolidate the knowledge and explore current dynamics, understand knowledge progression, elicit trends, and provide future research directions for IPO pricing research.Design/methodology/approachThe authors conducted a two-stage hybrid review based on 512 high-quality Scopus articles on IPO pricing published over the last decade. The authors deploy bibliometric analysis, and then, based on 61 curated articles, the authors conduct content analysis and offer future research directions.FindingsFour key research streams emerged: information asymmetry, agency problems, legal, regulatory, and social environment, and behavioral finance. Future research may focus on behavioral explanations for IPO underpricing, the role of investor sentiment in IPO pricing, text analytics, machine learning, and big data in alleviating information asymmetry and agency problems. The authors summarize and present content analysis using the classic Theory, Context, Characteristics, Methods (TCCM) framework.Research limitations/implicationsUsing different databases, bibliometric analysis tools, sample period or article screening criteria for the study might give different results. However, the study's major findings are robust to alternative choices.Practical implicationsThis study serves as a ready reckoner for the research scholars, practitioners, regulators, policymakers, and investors interested in understanding the nuances of IPO pricing.Originality/valueThe study sheds light on the most influential documents, authors, and journals, offers an understanding of knowledge structure, identifies and discusses primary research streams and related implications, and provides future research directions.

Are Korea individual investors irrational in initial public offering (IPO) market? An explanation from the winner’s curse perspective

Individual investors are often regarded as irrational sentiment investors whose investment behaviour is affected by psychological factors. This study measures the actual investment return of individual investors who participated in initial price offering (IPO) stock investment in the Korean market from the short-term and long-term perspective and investigates the relationship with IPO characteristics that affect the investment sentiment of individual investors. Even though the underpricing of IPO stocks on the first day of listing on average reached 31% over the past 13 years, individual investors in the Korean stock market earned very little actual return on IPO stock investment. The market-adjusted return on IPO stock investment on the first day was about −0.5%, and even if they held IPO stocks for one year after listing, it was only 3.4%. The so-called winner’s curse, in which individual investors are allocated relatively many overvalued stocks appears to be present in the Korean IPO market. The allocation of IPO stocks by individual investors depends on several factors that reflect individual investors’ sentiment, such as past performance of previous IPOs, past industrial returns, institutional investors’ investment intent, offering size, an upward revision of the offer price, and issuing firm’s financial soundness. It was found that the higher the individual allocation rate, the lower the short-term investment return on the first trading day, confirming the winner’s curse risk of individual investors. However, in the long run, a reversal of returns was observed, in which the long-term returns of IPO stocks with high individual allocation rates rose. In order to mitigate the winner’s curse risk, it is desirable to reform IPO pricing mechanisms and allocation rules in a way that reduces the asymmetry of information between institutional and individual investors and reflects the subscription demand of individual investors.

Is money really left on the table? The role of regular investors in IPO pricing

AbstractWe study how ongoing relationships between lead underwriters and institutional investors affect initial public offering (IPO) pricing. By introducing a new approach, we find that stronger relationships reduce the partial adjustment of the offer price, leaving ‘excess underpricing’ that favors regular investors, especially in hot IPOs, while generating an agency cost for issuers. At the same time, stronger relationships lead to higher offer prices, since they reduce information asymmetries and uncertainty in the primary market. This ‘excess price adjustment’ creates value for issuers. Taken together, these two apparently contradictory results reveal a win‐win outcome for issuers and regular investors.

Uncertainty, prospectus content, and the pricing of initial public offerings

This study reports evidence on the relation between the pre-market due diligence and book-building processes in determining initial public offering (IPO) share prices. The evidence suggests that there is a complementarity between these processes that has not been discussed in the literature. We find that when there is greater uncertainty regarding the value of the shares, more information of the type that investors are likely to have a comparative advantage in evaluating tends to be included in the offering prospectus prior to the roadshow. The increase in these disclosures is, in turn, associated with greater information discovery during book-building.

The pricing and performance of IPOs in China’s poor counties

In the context of China’s drive to alleviate poverty, we focus on the initial public offering (IPO) firms located in China’s poor counties and investigate their IPO pricing and post-IPO performance. Contrary to the findings reported for the U.S., we find that the problem of information asymmetry between Chinese firms located in rural areas and their investors is so severe that these IPO firms are associated with significantly higher underpricing. This effect is more pronounced for firms located in rural areas with poor traffic systems. We do not find significant market performance differences between rural and urban firms after their IPOs, but the operating performance of rural firms improves in the short term. Our additional analyses indicate that rural IPO firms have significantly lower investor attention and higher agency costs than urban firms. Overall, we enrich the literature on IPO pricing and the economic effects of geographic location.

Why Pre-IPO Studies Are Unsound in Concept and in Practice

This article explains why pre–initial public offering (IPO) studies are not a valid basis for determining marketability discounts. They are unsound in concept because the pre-IPO transactions and the subsequent IPO are priced at materially different dates and because the IPO price is not knowable at the earlier date. They are unsound in practice for several reasons, such as selectivity—the data include only companies that subsequently become publicly traded—and the fact that any pre-IPO discount includes not only a marketability discount but also a second discount for the risk that the IPO may not take place.

Factors Related to Small- and Mid-Capitalization Pharmaceutical Company Success Using Stock Performance as a Surrogate.

BackgroundDeveloping novel pharmaceuticals demands substantial investment despite high uncertainty of success and ultimate market value. While many established drug companies are highly profitable and have large portfolios of diversified assets, much of new drug innovation, a very high-risk, high-reward gambit, stems from smaller companies striving to bring their first products to market. While drug costs, and thus pharmaceutical company profits, can be controversial, it is unquestionable that the products from these companies provide great benefit to humanity. Hence, the ongoing success of the industry as a whole is quite relevant from a public health perspective.MethodologyWe sought to investigate factors influencing pharmaceutical company success using company stock performance on major US indices as a surrogate. As the profitability of large-capitalization (cap) pharmaceutical companies is well established, we focused on small- and mid-cap companies in this analysis. Small- and mid-cap pharmaceutical companies (both currently active and now defunct) and historical share prices were captured, including company details and the nature of drug pipelines. Funding by US academia was acquired via CMS.gov Open Payments and categorized into contributions < or ≥$100,000. Stock performance was considered good (+ ≥25%), mediocre (±25%), or poor (- ≥25%). Univariate and multivariate associations were assessed.ResultsOf the 420 companies included in the analysis, 101 (24%) had good, 76 (18%) mediocre, and 243 (58%) poor performance. The following were associated with performance in univariate analysis: initial public offering (IPO) price (P < 0.001), time from IPO (P < 0.001), number of drug programs (P = 0.019), and academic funding (P = 0.00013), with trend for diverse pipelines (both oncology and nononcology programs under development) (P = 0.069). On multivariate analysis, IPO price was inversely associated (P < 0.0001), while academic funding (P < 0.0001) and more drug programs (P = 0.0025) were positively associated with performance. Analysis of pharmaceutical IPOs since 2000 suggests a 20% rate of outright company failure.ConclusionsThe majority of included companies had lackluster stock performance, suggestive of low potential for drug development success and high probability of financial disaster. Robust drug pipelines and academic collaboration seem to be strongly related to company success.

IPO Valuation and IPO Inter-Industry Effects

This study examines the valuation effects of initial public offerings (IPOs) and intra-industry effects of IPOs in Turkey between 2010 and 2018. The purpose of this study is to find out whether initial public offerings are overvalued and whether they impact the pricing of industry peers. First, the valuation of IPOs is investigated. Price-to-value ratios of Turkish IPOs are compared with sector average ratios to determine whether IPOs are overvalued. Turkish IPOs are not overvalued against industry rivals’ price-to-value ratios based on sales and earnings-before-interest-taxes-depreciation-and-amortization (EBITDA) and earnings. Similarly, valuation based on price-to-value ratios is not related to initial pricing of IPOs. Second, the intra-industry effects of IPOs are investigated. Sector-adjusted abnormal returns of IPOs are compared to market-adjusted abnormal returns. The results are not affirmative: There is no statistically significant difference between the two abnormal returns. Turkish IPOs do trigger significant price declines on rival companies’ stocks. Altogether, the findings indicate that there is neither overvaluation of IPOs nor intra-industry effects over rival companies. Companies do not time the market based on industrial overvaluation. This may indicate market efficiency or lack of competition in the IPO market.

Democracy and the pricing of initial public offerings around the world

We find a negative relation between democracy and initial public offering (IPO) underpricing for a sample of 23,050 IPOs across 45 countries. The effect of democracy on underpricing is weaker for IPOs audited by Big 4 auditing firms, backed by venture capital firms, and with better disclosure specificity of use of proceeds. Democracy exerts a larger influence on underpricing for firms with higher agency problems, in countries with weaker institutional quality or shareholder protection, and during periods of high investor sentiment or economic policy uncertainty. Overall, our results highlight the importance of democracy in reducing IPO underpricing around the world.

Noise from online discussion forums: Evidence from IPOs in China

In this study, we use initial public offerings (IPOs) in China to investigate how online stock forums influence information asymmetry and IPO valuation. The empirical analysis isolates the underpricing and overvaluation components of initial returns. The number of forum comments, postings, and readings are positively associated with initial returns and the degree of underpricing, implying that forums create noise that exacerbates information asymmetry during IPOs. This effect is amplified by the quiet period regulation, which drives investors to rely on online discussion forums to obtain information. Through sentiment analyses of forum posts and media coverage, we find that the negative effect of online forums is more prominent when bad news prevails. We clarify the role of online stock forums in IPO pricing and information asymmetry by separating underpricing from overvaluation in initial returns.

Global Board Reforms and the Pricing of IPOs

AbstractWe document that global board reforms are associated with a significant reduction in the underpricing of initial public offerings (IPOs). The effect is amplified for IPOs with greater agency problems and mitigated for IPOs certified by reputable intermediaries, IPOs with greater disclosure specificity, and IPOs in countries with better shareholder protection and stringent financial reporting regulations. Furthermore, global board reforms have led to an improvement in the long-term market performance, proceeds, and subscription level of IPOs and have enhanced board independence in the issuing firms. Our findings suggest that global board reforms have strengthened board oversight in the issuing firms, leading to less underpriced IPOs.

Valuation Uncertainty and Short-Sales Constraints: Evidence from the IPO Aftermarket

We use the initial public offering (IPO) setting to provide evidence that the combination of valuation uncertainty and short-sales constraints generates significant equity market mispricing. The IPOs that we predict to be most susceptible to overpricing in the immediate aftermarket have first-day returns of +47% and lockup expiration returns of [Formula: see text]9%. Our detailed analysis of securities lending market data confirms that these IPOs experience severe short-sales constraints that peak around the lockup expiration. Our paper both explains the anomalous pricing of IPOs and highlights the importance of valuation uncertainty and short-sales constraints in explaining equity mispricing. This paper was accepted by Brian Bushee, accounting.

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.

Do Media Connections Help? Evidence from IPO Pricing in China

Using manually collected data of Chinese initial public offering (IPO) firms, this study examines how social connections between executives of media and firms affect IPO pricing. We find that media-connected firms receive more media coverage than their unconnected peers, and the tones of their coverage are also more positive, resulting in less IPO underpricing. However, we find that media-connected firms have worse post-IPO market performance. Although media-connected firms have better pre-IPO accounting performance than their unconnected peers, they conduct more earnings management under the cover of their connected media. Our additional results show that the negative effect of media connections on IPO underpricing is more pronounced for regionally and locally connected media, in non-state-owned enterprises, and firms with less institutional ownership. Our results are robust to alternative proxies for IPO underpricing, matching analysis, instrumental variable analysis, and placebo tests. Collectively, our findings suggest that media connections compromise IPO pricing efficiency.

Price Discovery from Offer Price to Opening Price of Initial Public Offerings

We examine the price discovery process of initial public offerings (IPOs) from the offer price to the first day’s open price. Stock exchanges have made major changes to the IPO preopening process, and introduced an open auction process in which all investors are able to enter orders and participate in price discovery. The time spent in preopening has increased for IPOs over the years, with an average of 77.23 minutes in 2020. The same pattern is not found for special purpose acquisition (SPAC) offerings. The percentage of the day’s volume executed in the IPO Cross is much higher, at 15.3%, than the approximately 1% for non-IPO stocks. Each phase of preopening contributes to incremental price discovery, with almost all of the price adjustment occurring during preopening. However, for “cold” IPOs, half of the price adjustment takes place after the market opens. Even though participation by retail investors has increased during preopening, their role in price discovery is limited. Our results suggest that institutional investors use the IPO Cross to sell shares. We also find that underwriters take advantage of changes implemented after the Facebook IPO that gave them a bigger role in deciding when to release an IPO for trading.

The Pricing of Initial Public Offering and Market Efficiency

The Pricing of Initial Public Offering and Market Efficiency

Social Capital and the Pricing of Initial Public Offerings

Using a sample of 4,892 IPOs in the United States from 1990 to 2019, 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 relation holds for a range of robustness tests, including those addressing endogeneity. Additionally, the relation is weaker among IPO firms with less information uncertainty, and stronger for IPO firms with more agency problems. Overall, our results demonstrate the importance of social capital as an informal contracting mechanism in enhancing the pricing and performance of IPOs.

SEC Workload, IPO Filing Reviews, and IPO Pricing

We analyze the interaction between high workload of the Securities and Exchange Commission (SEC) staff and the information production stimulated by their review process of initial public offerings (IPOs). We find that high workload is associated with more general comments in the first letter, with fewer overall comments for later letters, and that the SEC answers quicker while being busy. Using a measure of initial SEC concerns based on comment counts, we reinforce the empirical evidence on the relationship between the IPO filing review and (downward) offer price revisions. However, this correlation disappears for IPOs, where the filing review is conducted under a high workload. Consistent with theories on investor compensation and information asymmetry, we find underpricing to be significantly larger for these IPOs.