IPO Investors Research Articles

Are IPOs Really Underpriced?

While IPOs have been underpriced by more than 10% during the past two decades, we find that in a sample of more than 2,000 IPOs from 1980 to 1997, the median IPO was significantly at the offer price relative to valuations based on industry peer price multiples. This overvaluation ranges from 14% to 50% depending on the peer matching criteria. Cross-sectional regressions show that overvalued IPOs provide high first-day returns, but low long-run risk-adjusted returns. These IPOs have lower profitability, higher accruals, and higher analyst growth forecasts than undervalued IPOs. Ex post, the projected high growth of IPOs fails to materialize, while their profitability declines from pre-IPO levels. These results suggest IPO investors are deceived by optimistic growth forecasts and pay insufficient attention to profitability in valuing IPOs. Copyright 2004, Oxford University Press.

Early internet IPOs versus subsequent entrants

This paper examines whether investors in early Internet IPOs earned superior returns to those who invested in later entrants. We document three differences between early public firms in a new Internet technology and their followers: underpricing, operating characteristics at the IPO, and stock price performance after the IPO. We find that there is value in going public relatively early in a new Internet technology. Specifically, long-term returns are significantly higher for the early entrants. We also find evidence, consistent with previous studies that examine hot IPO markets, that the early public firms have better operating characteristics at the IPO than later entrants.

Takeover Defences and IPO Firm Value in the Netherlands

AbstractThe central question of this study involves the relation between the use of takeover defences and IPO firm value. We report that management frequently uses takeover defences before taking the firm public. The use of takeover defences is primarily motivated by managerial entrenchment. IPO investors anticipate potential conflict of interests with management and reduce the price they pay for the IPO shares if takeover defences are adopted. Although managers internalise this cost of takeover defences to the degree they own pre‐IPO stock, they are likely to gain through private control benefits. Non‐management pre‐IPO owners lose. Their shares are worth less, but different from managers, they do not get offsetting private control benefits. We infer that managers use takeover defences to protect private control benefits at non‐management pre‐IPO owners’ expense.

The Distribution of Information among Institutional and Retail Investors in IPOs

This study examines investor performance in IPOs using a unique database comprising 85,384 investors and 29 offerings from Finland. The evidence indicates that on average institutional investors do not obtain larger initial returns than retail investors, as the incentive to acquire information is limited by allocation rules which favour small orders. This result is in contrast to findings by Aggarwal et al. (2002), who show that institutional investors perform better in a bookbuilding environment. Within each investor category, however, large orders are associated with the best performance, suggesting that information differences figure more importantly within rather than between categories.

How Diverse are Accounting Practices for IPO Profit Guarantee Shortfall?

IPO profit guarantee was prevalent among companies going public on the Second Board in Malaysia during 1996-1999, whereby the major shareholders provided guarantee to the IPO investors that the forecasted and projected profits of the company would be achieved over the next three years following listing. Following the Asian financial crisis in 1997-1998, shortfalls in guaranteed profits were pervasive. This study documents that out of 103 companies with IPO profit guarantees, more than 40 percent reported shortfalls. Examining the annual reports of the companies with shortfalls reveals that the accounting practices to account for the shortfalls are quite diverse although they are generally in line with the applicable accounting standards. The common approach is to immediately disclose the shortfalls (without accruing them) as contingent assets when they become probable of collection. Equally common is the method of recognising the shortfalls (either immediately or delayed) by crediting retained earnings when compensations for the shortfalls become almost certain. There are also cases, although very few, of companies not making timely or any disclosure which contravene the Listing Requirements of the Kuala Lumpur Stock Exchange.

The Coordinating Role of Public Information in Hot Market IPOs

This paper argues that two features of the new issues market, the rules of the game for the way bookbuilt IPOs are conducted and the public signals generated by previous IPOs, create incentives for investors that increases the probability that an IPO becomes 'hot'. Intentionally underpricing offerings that attract strong interest makes coordination among investors desirable. A high public signal acts as a coordinating device because investors use it to form beliefs about the beliefs of other investors. An investor believes other investors will submit large buy orders in the IPO, and will choose to buy as well. During a hot market public information can dominate private, and IPOs by firms that produce low private signals can still be successful. The role of public information in coordinating the actions of investors in IPOs provides an explanation for why small changes in market conditions can lead to large volatility in the volume of IPOs. The probability of an IPO becoming hot depends critically on the IPO rules. Reducing intentional underpricing and allocating shares more equitably lowers the incentive to buy and the probability of a hot offering. The bookbuilding method may be more conducive to generating hot markets than alternative IPO mechanisms.

IPO Underpricing, Trading Volume, and Investor Interest

The level of in an IPO prior to its issue influences its offer price, its initial return and its initial trading volume. After issue, this interest level impacts the stock's long-term trading volume, leading to a positive relationship between an IPO's initial return and its trading volume for more than three years after issuance. Using newspaper references as a proxy for the level of interest in a firm, I find that investor interest is positively related to initial return, initial trading volume and long-term trading volume.

Conversions of mutual savings institutions: Do initial returns from these IPOS provide investors with windfall profits?

We examine initial returns of fully underwritten IPOs of converting thrifts for evidence that managers and depositors of conversion-related offers earn significantly greater returns than investors in IPOs of other financial institutions. Regulators have suggested that new guidelines for conversion from a mutual to a stock thrift are designed to curb “windfall profits” earned by insiders investing in conversion-related IPOs. While there are reports of average initial returns of more than 20% for conversion-related IPOs, our results suggest that investors earn average initial returns of about 7%, which is not significantly different than returns from IPOs of other thrifts and commercial banks.