Pricing Of Initial Public Offerings Research Articles

A Study on Factors Influencing the Initial Public Offerings (IPO) in the Bombay Stock Exchange (BSE), India

This study has examined the IPO performance in India from 2007 to 2013. Results show that under-pricing exists in the first day of trading during the particular period, but results show that the degree of under-pricing is dramatically decreased in comparison with what is shown in previous studies. The study finds that the IPOs are influenced by its issue variables. The face value of the shares and oversubscription subscription of the share are highly affected factor for underpriced in initial day of listing. After 36 months of listing the IPOs are underperformed by 29.06 percent and market capitalisation of the firm, issue premium of the share, face value of the share, issue price, and oversubscription of IPOs are highly influencing IPOs performance in long run. The study has considered 146 companies for identifying the factors influencing the Initial Public Offerings (IPO) in the Bombay Stock Exchange (BSE), India.

The role of optimistic news stories in IPO pricing

This study investigates the influence of optimistic news stories on first-day pricing of initial public offerings (IPOs) in Australia between 1995 and 2005. Unlike the United States, Australia has no quiet-period regulation limiting the dissemination of information from media before IPO listing dates. We find that optimistic news stories are negatively associated with IPO underpricing. Results from a relative valuation model show that IPOs which received positive news stories ahead of the first trading day are not overpriced relative to their industry benchmarks. These results suggest that optimistic news stories mitigate information asymmetry and adverse selection problems. However, optimistic news stories do not appear to inflate the share price on the first day of trading. Our findings suggest that regulation mandating a ‘quiet period’ before the commencement of trading in IPOs is neither necessary nor desirable in the Australian environment.

The effect of capital gains taxes on the initial pricing and underpricing of IPOs

We investigate the extent to which capitalization of expected capital gains taxes and the lock-in effect induced by the capital gains tax rate differential simultaneously impact the pricing and underpricing of initial public offerings (IPOs). Using a large sample of IPOs from 1987 to 2010, we estimate regressions of offer prices and first-day underpricing on tax rates. Supporting tax capitalization, IPO offer prices decrease in long-term capital gains taxes. Supporting lock-in, IPO underpricing increases in the long-term and short-term tax rate differential. These effects are consistent with capital gains taxes simultaneously reducing IPO proceeds and exacerbating IPO underpricing.

Issuer Operating Performance and IPO Price Formation

ABSTRACTWe study the relation between issuer operating performance and initial public offering (IPO) price formation from the initial price range to the offer price to the closing price on the first trading day. For a post‐bubble sample of 2001–2013 IPOs, we find that pre‐IPO net income and, in particular, operating cash flow are strongly, positively associated with the revision from the mid‐point of the initial price range to the offer price and that the “partial adjustment phenomenon” concentrates among issuers with the strongest operating performance. As for why publicly observable information helps predict changes in valuation from when the initial price range is set to when the offer price is set, our findings suggest that strong‐performing issuers, especially those offering small slices of ownership, have lower bargaining incentives and are susceptible to the underwriter(s) low‐balling the price range. Overall, our results suggest an important role for accounting information in understanding the pricing of book‐built IPOs and are consistent with the presence of agency problems between issuers and underwriters.

Heterogeneous expectations, IPO Underpricing and issuing mechanism

Compared with the fixed-price mechanism, the bookbuilding mechanism has not changed the Chinese IPO high underpricing. How to develop scientific and reasonable IPO pricing, and reduce the high IPO underpricing has become a major challenge for China's securities market. In this paper, using behavioral finance theory and game theory, we build the Initial public offering (IPO) pricing and underpricing models with investors’ heterogeneity based on different issuing mechanisms and provide a comparative analysis. Firstly, our models show that IPO underpricing will not be eliminated by using either fixed-price or bookbuilding mechanisms, but when the investors’ heterogeneity expectation is the same, lower IPO underpricing can be obtained by the issuing of bookbuilding compared with that of fixed price. Secondly, the IPO underpricing may be larger than that under fixed price if the heterogeneity of investors under bookbuilding is larger than that under fixed price. Thirdly, the numerical analysis results provide strong support for our model. These findings further explains the cause of the high IPO underpricing long-standing in China.

Global diversification and IPO returns

A large number of newly listed firms have significant involvement in international business activity. In this paper, we examine the effect of international business activity on the pricing of initial public offerings (IPOs), post-IPO performance, and survival. In a large sample of U.S. IPOs over 1981–2012, we find that firms with exports and/or foreign sales prior to going public have significantly lower underpricing than firms without international business activity. Furthermore, firms with international business activity significantly outperform purely domestic IPO firms over 3- and 5-year periods after going public and have a significantly higher survival rate. Overall, we provide strong evidence that global diversification has an economically significant effect on the valuation and subsequent performance of firms going public.

Do Underwriters Compete in IPO Pricing?

We propose and implement a direct test of the hypothesis of oligopolistic competition in the U.S. underwriting market against the alternative of implicit collusion among underwriters. We construct a simple model of interaction between heterogeneous underwriters and heterogeneous firms and solve it under two alternative assumptions: oligopolistic competition among underwriters and implicit collusion among them. The two solutions lead to different equilibrium relations between the compensation of underwriters of different quality on one hand and the time-varying demand for public incorporation on the other hand. Our empirical results, obtained using 39 years of initial public offering (IPO) data, are generally consistent with the implicit collusion hypothesis that banks, especially larger ones, seem to internalize the effects of their underwriting fees and IPO pricing on their rivals. This paper was accepted by Neng Wang, finance.

Morrison, the Restricted Scope of Securities Act Section 11 Liability, and Prospects for Regulatory Reform

The strong presumption against extraterritorial application of federal securities laws, as articulated in Morrison v. National Australia Bank, has significant implications for liability under Section 11 of the Securities Act. Morrison restricts federal securities law liability to purchases or sales listed on domestic exchanges and domestic transactions in other securities. In an initial public offering (IPO) of shares qualified for U.S. exchange listing, exchange trading begins only after completion of an off-exchange distribution to at least 300 round lot purchasers. The exchange subsequently conducts an opening cross that sets an initial aftermarket exchange trading price that often differs from the IPO price. Purchasers of IPO shares in the initial distribution are not transacting on a domestic exchange, and therefore cannot satisfy Morrison's first prong. If these purchases are non-domestic transactions, then they also fail Morrison's second prong. It follows that shareholders who engage in non-domestic transactions in an initial distribution of IPO shares have no valid Section 11 claims, even if their securities are subsequently traded on U.S. exchanges. Aftermarket purchasers must satisfy strict tracing requirements in order to assert Section 11 claims. But no precedent suggests that aftermarket purchasers can satisfy the tracing requirement by purchasing from an initial holder who acquired in a non-domestic transaction that Congress never intended to protect with a Section 11 right of action. Put another way, no court has ever recognized the existence of a springing Section 11 right that privileges an aftermarket purchaser with a Section 11 claim that never existed in the hands of the original purchaser. To be sure, aftermarket purchasers may have valid Section 10(b) claims, and therefore have private rights of action that address potential fraud. However, the strong presumption against extraterritorial application of the federal securities laws, the rule of narrow construction of implied private rights of action, the very structure of the federal securities laws, the text of Section 11 itself, and the statute's legislative history, all combine to suggest that the courts should not invent springing” Section 11 rights of action in favor of purchasers who take from initial holders that Congress never intended to protect with Section 11 rights in the first instance. But if an initial public offering involves a non-domestic distribution, and if even a small number of foreign-placed shares enter the market when exchange trading begins, then, given the mechanics of modern securities markets, no aftermarket purchaser will be able to demonstrate that they purchased shares subject to Section 11’s territorial reach. The class with Section 11 rights of action would therefore be limited to domestic purchasers in the initial distribution. This limitation could, in some instances, dilute the incentive to engage in due diligence and have other consequences that the SEC could view as contrary to the public interest. The Commission can respond administratively by requiring that initial distributions occur only through transactions “deemed” domestic by, for example, requiring undertakings that commit registrants not to challenge Section 11’s application to shares originally distributed in non-domestic transactions. In addition, the Commission could cause reforms to the CUSIP numbering system that would allow aftermarket purchasers to satisfy Section 11 tracing requirements in situations where tracing has historically proved impossible. Congress could also address these concerns through legislative action, though recent data suggest such an outcome is unlikely.

An empirical study of executive option grants around initial public offerings

Abstract From insider trading filings, we compile a comprehensive sample of executive options granted to executives and board members around initial public offerings (IPOs) from 1996 to 2008 and find a spike of option grants around IPOs. Using this sample, we investigate the determinants of IPO options and their effects on IPO pricing and long term performance. We find that granting IPO options is correlated with insiders selling secondary shares and reducing ownership stake in the offering. This evidence suggests that IPO options are likely substitutes for insiders’ diluted ownership due to IPOs. IPO options, however, are not a management self-serving mechanism as we find no significant relation between IPO options and underpricing, nor do they align executive interest with shareholders for better performance as we find that IPOs with IPO options do not have better long-run stock returns or operating performance than IPOs without IPO options.

Information Production within the Venture Capital Market: Implications for Economic Growth and Development

I find venture capitalists' (VCs') information production activities help decrease uncertainty about the valuations of new innovations within public equity markets, resulting in price convergence within the cross-section of Initial Public Offerings (IPOs) that are backed by different classes of VCs and price convergence between VC and non-VC backed IPOs. These findings provide evidence that venture capital financing can be a component of an effective or efficient price discovery process within public equity markets, and yield positive externalities in so far as the pricing of non-VC backed IPOs are concerned. Given a decrease in valuation uncertainty within stock markets ultimately results in lower costs of capital for issuing firms, larger stock markets, and improvements in market liquidity, my findings provide evidence that VCs' information production activities are beneficial for economic growth (market size) and economic development (price discovery processes).

Performance of Initial Public Offerings: Evidence from Hong Kong

Abstract This paper presents the findings of a study on the performance of the initial public offerings (IPO) of shares listed on the Hong Kong Stock Exchange (HKEx), which has been the largest IPO market in the world since 2009. One indicator of the success of an IPO is its subscription rate, which can be used as a proxy for the level of investor confidence in the stock being offered. This paper examines the relationship between the performance of an IPO and its subscription rate, and the corporate factors that may affect an investor's decision to subscribe to an IPO. The Hong Kong evidence can help shed light on the importance of agency cost in the pricing of IPOs.

Evolution of integer price clustering of IPOs in the aftermarket

Purpose – The purpose of this paper is to, using a large sample of NASDAQ initial public offerings (IPOs), examine the evolution of integer price clustering of IPOs in the aftermarket trading. Design/methodology/approach – Consistent with Harris’s (1991) costly negotiation hypothesis, clustering on integer prices is a positive function of price level and various stock valuation uncertainty proxies, and it is a negative function of trading activities for IPOs and seasoned stocks. Findings – It was found that, after controlling for price level, daily return volatility, number of trades, trading volume, number of market makers and the effect of price support, the integer price frequency of IPOs converge to that of seasoned stocks immediately, and whether IPOs have integer offer prices does not affect their integer price clustering in the aftermarket trading after the effect of price support is controlled for. Originality/value – These results suggest that the IPO pricing process significantly reduce the differences between integer priced IPOs and non-integer priced IPOs in pre-offering valuation uncertainty.

A Survey of Literature on IPO Market Puzzle: Determinants of Listing Day Returns in IPOs

Initial public offering (IPO) related activities created, one of the greatest puzzles in finance researchers and practitioners, and maximum no. of theories in this regard. In fact, puzzles are many, from underpricing by issuers to subscription of overpriced securities by investors, from issuer’s content with underpricing Underwriters to sentiment investors to shun rationality, from market efficiency to moral hazard and agency problem, from time varying pattern to cross country varying pattern, from assumption about rationality to sentiment investors, and so on, the puzzles goes up to varying assumptions from market participants to impact of regulations. Soon after, IPO pricing puzzle took center stage in finance literature debates, researchers proposed various theories and interpretation to explain the puzzle. Different researchers made different assumptions about market, about participants, about behavior, about risk, about definition of underpricing etc. while some theories were developed with induction approach; some were developed with deduction approach too. While some researchers were proposing their theoretical models, several other researchers were contributing with insights from their empirical studies. IPO puzzle witnessed maximum no. of theories and hypothesis to explain the puzzle, developed on different basis. Some theories were developed based on information asymmetry, some based on institutional framework and some were based on behavioral basis. However, several theories that were proposed as competing (as alternative), with a closer look, might look actually completing each other in explaining the wider phenomena of IPO puzzle, because of their varying assumptions that covers different aspect or states of market. This literature review has been done with objective to review theoretical literature developed to explain IPO puzzles in such comprehensive framework, to examine, if they together could be fitted into a unified picture of IPO theory. The objective is to contribute towards reductionism of the theories and to provide some ground for future research questions. The focus area is mainly theoretical review of literature; however, help of some empirical work that were observed during the work is taken with limited purpose to complete the analysis. In this process, some methodological issues with empirical analysis and suggestions are also discussed for use of future empirical work in this field to make result more unbiased and inclusive. A potential new model is suggested that can incorporate various complementing models into one to solve IPO market puzzles.

IPO Pricing Mechanisms in the Presence of When-Issued Markets

In some countries, it is common that initial public offerings (IPOs) are preceded by forward ("when-issued") trading of the shares; in the US, such trading is prohibited. We analyze the effect of when-issued trading on the pricing and allocation of IPO shares. We demonstrate that the optimal selling mechanism in the presence of when-issued trading differs qualitatively from the optimal mechanism if such trading is prohibited. Furthermore we show that trading rules in the when-issued market can be designed so that allowing when-issued trading results in an increase in expected issue proceeds.

China’s Securities reforms and IPO wealth loss

We revisit initial public offering (IPO) underpricing in China before and after the 2001 China Securities Regulatory Commission reforms targeting the IPO process and strengthening corporate governance, using Habib and Ljungqvist’s (2001) wealth loss measure instead of headline underpricing. Habib and Ljungqvist argue that the extent to which owners care about underpricing depends on both headline underpricing and the percentage of IPO shares issued relative to total shares outstanding. We find that in the post-reform period, relative to the pre-reform period, the wealth loss for pre-IPO owners is lower, the incremental effect of the association between wealth loss and state-retained ownership is significantly positive, and a higher proportion of independent directors on the board moderates the wealth loss. Our findings suggest that the more market-oriented IPO process and the corporate governance reforms provide insiders of Chinese IPO firms with greater opportunities to influence IPO pricing and thereby reduce their wealth loss.

Underpricing of IPOs in Saudi Arabia and Sharia compliance

Purpose– The purpose of this paper is to explore the extent of underpricing in the Saudi Arabian market of initial public offerings (IPOs), offer explanations and consider whether Sharia-compliance had a significant impact on the initial returns.Design/methodology/approach– A comprehensive sample of 72 IPOs in Saudi Arabia between 2004 and September 2010 is used to analyse the initial return after adjusting it to the market movement as well as controlling for some common factors.Findings– This paper finds that not only underpricing occurs but it is also among the highest levels in the world. While traditional factors affecting initial returns include age, market timing and firm size, it is found that Sharia compliance significantly reduces underpricing in Saudi Arabia. This may imply that Sharia compliance helps to reduce the uncertainty and consequences of the limited information inherent in IPOs.Research limitations/implications– Further research is needed to see if the effect of Sharia compliance status on the short-run performance of IPOs extends to other Islamic countries or is a country-specific characteristic. More firms need to be examined to identify the market characteristics that drive the returns.Practical implications– Very substantial sums are being “left on the table” and more efficient pricing of IPOs would be of considerable benefit to firms.Social implications– By considering two different regimes, this paper offers some important lessons for the treatment of risk-taking, particularly in Islamic countries.Originality/value– This paper is among the first to provide an empirical evidence of the impact of Sharia compliance on the initial return pattern in the IPO market.

IPO Pricing Mechanisms in the Presence of When-Issued Markets

In some countries, it is common that initial public offerings (IPOs) are preceded by forward (when-issued'') trading of the shares; in the U.S., such trading is prohibited. We analyze the effect of when-issued trading on the pricing and allocation of IPO shares. We demonstrate that the optimal selling mechanism in the presence of when-issued trading differs qualitatively from the optimal mechanism if such trading is prohibited. Furthermore we show that trading rules in the when-issued market can be designed so that allowing when-issued trading results in an increase in expected issue proceeds.

CHALLENGES TO CHINA'S NEW STOCK MARKET FOR SMALL AND MEDIUM-SIZE ENTERPRISES: TRADING PRICE FALLS BELOW THE IPO PRICE

This study discusses the development of the Growth Enterprise Board (GEB), a part of the Shenzhen Stock Exchange (SZSE), which allows small and medium-size enterprises (SMEs) to raise capital on favourable terms by issuing shares in China. We use all initial public offerings (IPOs) in the GEB market to model the probability of the trading price for new issues that will fall below their IPO price from October 2009 to December 31, 2011. Three probability models (logit, probit and scobit models) are used. The results show that four important factors explain the probability of trading price falling below their IPO price. A high first-day turnover ratio, a small price update, an optimistic stock market, and high average initial returns of other firms prior to an IPO issue all reduce the risk that the trading price will fall below the IPO price. The stock market returns have a non-linear significant effect on that probability. Our results are useful for regulators, underwriters, and issuers in the development of the GEB market.

How Bookbuilding Information Affects Korean IPO Pricing Processes

Using unique initial public offering (IPO) bookbuilding datasets, we examine how premarket auctioning activities, measured using oversubscription and institutional bids, affect the price-setting practices of underwriters in Korean IPOs. Three key findings emerge. First, final offer prices are set higher when institutional investors consider IPOs more favorably and thus bid more aggressively. Next, IPO underpricing increases with oversubscription and institutional bids increase with positive pricing information. Finally, the enhanced discretion over pricing of IPO shares prompted by the regulatory change in 2007 improves the efficacy of the IPO pricing processes by inspiring institutional investors to reveal their positive information more willingly.

The strategic reallocation of IPO shares

In this work, we study the reallocation of shares to retail and institutional investors, measured as the difference between the allocation declared before the initial public offering (IPO) and the effective allotment decided by the underwriter after the bookbuilding process. The reallocation is disaggregated into three components, two of which are under the direct control of the underwriter: the initial allocation, and the demand satisfaction ratio. The empirical analysis is based on a sample of 193 hybrid IPOs issued in Italy between 1997 and 2012. Controlling for firm and IPO characteristics, we find that the IPO shares are typically shifted toward institutional investors when positive information is collected during the bookbuilding process. The IPO pricing and share reallocation are found to be interdependent, and reallocation is used in combination with partial adjustment to reward institutional investors.