IPO Date Research Articles

Media Sentiment and the Pricing of IPOs

During an IPO the issuing firm experiences a dramatic visibility shock caused by a large amount of information released to the public. In this context the media play a pivotal role in conveying information to investors who mostly rely on second-hand and simplified news. We argue that the way in which news is presented may shape retail investors’ beliefs and in turn drive the demand for share and first-day returns. Based on over 2,800 US IPOs and over 27,000 newspaper articles we show that (a) positive tones are positively associated with IPO underpricing; (b) this effect is stronger when news is reported close to the IPO date or (c) by more reputable newspapers. As the article tone and IPO underpricing may be simultaneously driven by unobservable characteristics, we use the journalist’s idiosyncratic tone as an instrument to mitigate endogeneity concerns. However, our findings remain confirmed and robust even after controlling for the sentiment embedded in the SEC filings.

IPO market timing. The evidence of the disposition effect among corporate managers

Until now, IPO market timing has been mostly associated with a varying number of IPOs in certain periods of “hot” and “cold” issue markets. We would like to offer a different perspective. We focus on a speed of the IPO process, after the decision to go public was actually made. Our hypothesis is that in “hot market” managers will tend to minimize the time necessary to go public in order to take advantage of high valuations as quickly as possible. On the contrary, if the firm is not ready with the IPO on time and in the meantime the market falls during the going-public process, managers will tend to delay the IPO hoping that the good market conditions will come back soon. We argue that such a behavior might be attributed to the disposition effect among firms' managers.We find a statistically significant negative correlation between the market return and the speed of the IPO process. The absolute correlation coefficient is higher when the market return is calculated 90days prior to the Approval Date of the prospectus than when it is calculated 90days after the Approval Date. Hence, a vast part of the market influence on the speed of the offering process has its origin at the time when offering is formally not possible yet. External factors occurring after the Approval Date seem to be less important than the managerial decision influenced by observation of the market situation prior to the Approval Date.We also find that for firms débuting faster than the median of our sample, the average market return in the period between the IPO date and the median is positive. On the other hand, in the group of slower firms, the average market return in the period between the median and the IPO date is negative. There is an analogy between firms – débuting too fast in bullish market and too slow in bearish market, and investors – selling winning stocks too quickly and keeping falling stocks for too long in their portfolios. Both managers and investors seem to be biased by the S-shape utility function, as predicted by the prospect theory of Kahnemann and Tversky (1979).

Share transfer behaviour of newly introduced Tunisian companies and its determinants: An empirical analysis

This study seeks to determine the reasons behind original shareholder sales of particular numbers of shares at the IPO date. It also examines whether share transfer behaviour reveals specific characteristics of blockholders and if a non-linear relationship emerges between the variable representing the shares held by controlling shareholders immediately prior to the transaction and the share transfer variable. The sample consists of 46 Tunisian companies listed on the Tunis Stock Exchange during the period 1992–2012. Results show that the original shareholders sale decision depends significantly on company growth opportunities. Assignee shareholders benefit from favourable stock market conditions when they sell their shares at the IPO time. Share transfer behaviour depends on whether company ownership consists of a family or not, and on whether the shareholders are blockholders or not. Besides, controlling shareholders benefit from IPO to enhance their ownership.

IPO Market Timing: The Evidence of the Disposition Effect among Corporate Managers

Until now, IPO market timing has been mostly associated with a varying number of IPOs in certain periods of “hot” and “cold” issue markets. We would like to offer a different perspective. We focus on a speed of the IPO process, after the decision to go public was actually made. Our hypothesis is that in “hot market” managers will tend to minimize the time necessary to go public in order to take advantage of high valuations as quickly as possible. On the contrary, if the firm is not ready with the IPO on time and in the meantime the market falls during the going-public process, managers will tend to delay the IPO hoping that the good conjuncture will come back soon. We argue that such a behavior might be attributed to the disposition effect among firms’ managers.We find a statistically significant negative correlation between the market return and the speed of the IPO process. The absolute correlation coefficient is higher when the market return is calculated 90 days prior to the Approval Date of the prospectus than when it is calculated 90 days after the Approval Date. Hence, a vast part of the market influence on the speed of the offering process has its origin at the time when offering is formally not possible yet. External factors occurring after the Approval Date seem to be less important than the managerial decision influenced by observation of the market situation prior to the Approval Date. We also find that for firms debuting faster than the median of our sample, the average market return in the period between the IPO date and the median is positive. On the other hand, in the group of slower firms, the average market return in the period between the median and the IPO date is negative. There is an analogy between firms – debuting too fast in bullish market and too slow in bearish market, and investors – selling winning stocks too quickly and keeping falling stocks for too long in their portfolios. Both managers and investors seem to be biased by the S-shape utility function, as predicted by the prospect theory of Kahnemann and Tversky (1979).

The Fate of Patents: An Exploratory Analysis of Patents as IPO Signals of Reputational Advantage

The path between the patenting of an innovation and the actual commercialization of a new product or technology can be long and costly with 55 to 67 percent of issued U.S. patents lapsing for failure to pay maintenance fees before the end of their term. Drawing on the reputation literature and signaling theory, this paper empirically tests whether firms increase their use of patents prior to IPO date, and whether these patents are underutilized because they are used primarily to signal innovativeness to investors rather than to capture rents. Using data from the NBER database on 464 patents granted in the drug and medicine industry, results show that there is a significant relationship between an increase in patenting activities and the IPO date of a firm. In addition, as expected, many of these patents expire, reinforcing the notion that these patents serve as IPO signals of reputational advantage.

The Valuation of Pro-Forma Free Cash Flows in an IPO Setting: The Case of Canadian Income Trusts

The Canadian income trust organizational structure allows operating entities to pass on free-cash flows to unit-holders in a tax-efficient manner. This paper examines the market valuation of pro forma disclosures of free cash flows, known as distributable cash, disclosed by these income trusts in IPO prospectuses and annual reports and assesses whether the market fixates inappropriately on this measure.We collect distributable cash disclosures for a sample of business trusts that undertook initial public offerings on the Toronto Stock Exchange between 1997 and 2006.We have several key findings. First, when focusing on a single performance measure, we find that distributable cash is a better predictor of IPO date trading values than is net income. Following the IPO distributable cash continues to be the best predictor of market value, out-performing both net income and dividends. Second, based on a Mishkin test, we find that the market does not fixate on distributable cash levels. Finally, though distributable cash does a good job of explaining price levels, we show it is incomplete. Special items, a component of net income that is excluded from distributable cash, is statistically significant when added to distributable cash. Similarly, net income can be very useful as a performance measure provided the researcher uses a more complex valuation mapping such as a returns format. In total, the results suggest that, for the flow-through entities we examine, distributable cash is a simple and useful disclosure that appears to be treated by the market as close to permanent earnings as defined in Ohlson (2009). The market is sophisticated in incorporating this disclosure. However, the superiority of one measure over another depends on the taste of the researcher for model complexity.

Listing standards as a signal of IPO preparedness and quality

This paper compares three aspects of IPOs on the Toronto Stock Exchange's junior (TSX-V) and senior (TSX) markets: (1) share price performance on the first day and first year, (2) volume on the first day and first year, and (3) days between the predicted IPO date, IPO announcement date and actual IPO date. The primary difference between TSX and TSX-V IPO companies is that TSX-V companies are significantly more underpriced than TSX companies, even after controlling for other company-specific factors, which suggests higher listing standards provide a signalling benefit to companies over-and-above what companies themselves are able to signal. Similarly, TSX companies experience a shorter time from IPO announcement date to an accurately predicted actual IPO date, suggesting TSX companies are better prepared to overcome the hurdles of exchange regulators scrutinizing their preliminary prospectuses. Taken together, the evidence is consistent with the view that higher exchange listing standards screen out companies that are less prepared to go public. But the data show exchange listing standards are not directly related to 1-year share price performance and/or trading volume as those performance indicators are more closely connected to observable company-specific factors.

Mutual Fund Incubation: Innovation or Marketing Tool?

I provide evidence showing that during the incubation period, mutual funds face less stringent limits of arbitrage constraints and payoff complementarities problems. I document that incubated funds hold more illiquid and less-popular securities and are better at buying stocks in the incubation period than after their Initial Public Off er (IPO). I also find that, after their IPO's, incubated funds tend to hold more illiquid stocks, hold more concentrated portfolios, invest in less-popular securities and are better at purchasing stocks than non-incubated funds. This shows that, even after the IPO, incubated funds have diff erent portfolio characteristics and stock picking abilities than non-incubated funds which is a sign that fund incubation is a way fund families utilize to innovate. I also show that fund families are strategic when choosing IPO dates for their incubated funds. Families tend to launch their incubated funds when their past performance is high, consistent with a inflow-maximizing behavior. However, I also show that, holding everything else constant, non-incubated funds attract higher inflows than incubated funds.

Partial Adjustment to Public Information and the Efficiency of the IPO Process

This paper studies the effect of public information on the pricing of IPOs. It shows that public information (as inferred from market wide stock returns observed prior to the IPO) affects the pricing of IPOs by changing the incentives of investors to reveal private information to the underwriter during the subscription period, and by shifting the distribution in their demand for allocations. Consistent with empirical evidence, the model predicts a positive relation between market wide stock returns observed prior to the IPO date and the mean initial return, and a positive relation between the mean and the volatility of initial returns. In addition, it yields a number of new testable implications.

Why Do IPO Offer Prices Only Partially Adjust?

This study develops a structural model of the IPO pricing process that enables the estimation of adjustment rates for public and private pricing information gathered during bookbuilding. The estimated upward adjustment rate of public information is only 21%, significantly less than the 28% rate of private information. Adjustment rates decline towards the IPO date, especially for upward adjustments. The findings contradict information acquisition theories that predict a complete adjustment to public information and highlight the inefficiency of the IPO bookbuilding mechanism in handling new information even when the information is publicly available and especially when it is favorable.

On the anticipation of IPO underpricing: Evidence from equity carve-outs

We investigate IPO market efficiency using a sample of equity carve-outs offered during the period of 1985–2005. Unlike IPOs examined in previous studies where trading during the pre-IPO book-building period does not exist and trading on the IPO date is rationed, in equity carve-outs, investors can trade in the non-rationed market for shares of the parent, which holds a significant fraction of the subsidiary. We find that the subsidiary's initial day return is significantly related to its parent's return over the book-building period, but unrelated to its parent's contemporaneous return. Neither the pre-IPO price revision of the subsidiary nor the return to the parent on the initial trading day can be predicted. While the portion of the subsidiary's initial return unpredictable from information available during the book-building period is significantly related to its parent's contemporaneous return, the predictable component of the initial return is not. We interpret these results as evidence consistent with market efficiency.

The effects of venture capitalist affiliation to underwriters on short- and long-term performance in French IPOs

This paper explores the signalling and monitoring effects of venture capital (VC) backing and venture capitalist affiliation to lead underwriters on performance of IPOs in France. IPOs in which VCs are affiliated to lead underwriters ( i.e., affiliated VCs) have lower underpricing than both non-affiliated VC-backed IPOs and non-VC-backed IPOs. Similarly, affiliated VC-backed IPOs exhibit greater earnings surprise and better market performance at the end of the one-year period following the IPO date. Controlling for Fama and French [Fama, E.F., & French, K. 1993. Common Risk Factors in the Returns on Stock and Bonds. Journal of Financial Economics 33, 3–56] risk factors, our results suggest that IPOs with affiliated VCs in general, and particularly those affiliated with more prestigious underwriters, have a higher long-term abnormal return than both non-affiliated and non-VC-backed IPOs. Our analysis of IPO performance indicates that more prestigious underwriters enhance effective screening, certification and monitoring roles of affiliated VCs.

Ipo Pricing and Long Run Performance: Role of Comparable Firms, Valuation Models, and Uncertainty

We empirically demonstrate that IPO firms that have reliable comparable firms with extensive analyst coverage are priced right at the offer. Those who invested in an IPO firm's shares at the offering price and those who invested in corresponding Comparable firm's shares would have earned the same return on average over the five years following the IPO date. The median offering price of an IPO was the same as its intrinsic value computed using the Residual Income Model that takes these differences into account; but higher than its intrinsic value based on the P/E multiple of its Comparable firm. The first day return on an IPO is positively related to the absolute value of the difference between its offer price and intrinsic value computed using publicly available information, a proxy for the valuation uncertainty associated with that IPO.

Information Asymmetries and IPO Underpricing: The Role of Voluntary Disclosure of Forward-Looking Information in the Prospectus

When a firm files to go public it faces the risk of underpricing. Within the agency theory framework, models of underpricing are based on adverse selection and rely on the ways in which the different parties, involved in the IPO process, are asymmetrically informed as managers and internal subjects posses private information about the firm's future prospects which may be not completely known to external investors. The underpricing phenomenon, measured by the difference between the closing price and the opening price on the first day of trading, represents the cost paid by the issuer for the ex-ante uncertainty perceived by external investors. Thus, underpricing is often used as a proxy of the ex-ante uncertainty. Theoretical and empirical studies have evidenced that an issuing firm can reduce ex-ante uncertainty both by signalling the quality of the IPO through various mechanisms (e.g. a larger retention of ownership by the insiders, an appointment of high quality auditors, and highly reputable investment bankers as underwriters) and by disclosing information before the IPO deadline in the hope of decreasing the money left on the table. There are different ways and prospects through which a firm can disclose information before the IPO date. Among them, the most comprehensive document is the IPO prospectus. The EEC Directive n. 2003/71 regulates the contents of the prospectus by defining information that must be disclosed and information that can be voluntary disclosed: an issuer exercises considerable subjectivity in disclosing voluntary information such as projected financial statements, indication on future and planned investments, information on strategies - projected and implemented, EPS estimates, etc. to external investors. In this paper we contend that a higher level of voluntary disclosure leads to a lower level of underpricing, after having controlled for the mechanisms used for signalling the quality of the IPO. As the evaluation of IPOs is strictly linked with the value that external investors attribute to the perspective of new listed firms, and there is no information about past share price, risk and forward-looking information (FLI) in IPO prospectus play a crucial role in supporting financial analysts in their earnings forecasts. We analyse 85 IPOs issued between 1999 and 2005 on the Italian Stock Exchange by applying content analysis to the IPO prospectuses. The Italian set is very distinctive because, although in presence of low litigation costs, only few firms disclose earnings forecasts and prospective financial information even if law allows their inclusion in the IPO prospectus. We focus on the role played by narrative FLI contained in the IPO prospectus and by its attributes in relation with underpricing. Following previous literature, we study also the relation between underpricing and the extent of risk factors included in the prospectuses. We find a negative association between the level of underpricing and the extent of FLI in the IPO prospectus and a positive association between the level of underpricing and the number of risk factors disclosed.

Firm Age and Fluctuations in Idiosyncratic Risk

This paper presents empirical evidence that fluctuations in idiosyncratic risk are largely driven by the age characteristics of the firms composing the market. Consistent with previous studies, we find that the age of the typical firm at its IPO date has fallen dramatically from nearly 40 years old in the early 1960s to less than 5 years old by the late 1990s. Since younger firms tend to be riskier, this systematic decline in the average age of the typical public firm, combined with the increasing number of firms going public over the last 30 years, has caused the increase in idiosyncratic risk over the last four decades. We show that after controlling for the proportion of young firms in the market, this time period exhibits no trend in the time series of idiosyncratic risk. Moreover, we find some evidence of a negative trend in idiosyncratic risk after controlling for other measures of firm maturity.

Analysts Recommendations and Conflict of Interest

The objectives of the present research is to verify the degree of reliability of financial analysts' recommendations on IPOs in the Italian stock market and to measure their long-run performance distinguishing between the category to which the analyst belongs. In particular, we want to verify the hypothesis that analysts that work for the financial intermediary that has taken public the company, so-called affiliated analysts, have the incentive to issue positive recommendations on the IPOs irrespectively of the quality of the company, in contrast to the alternative hypothesis of information advantage of affiliated analysts compared to non-affiliated ones. The difference in performance of the IPOs recommended by the two types of analysts is statistically significant in magnitude both after one year (a difference of 43% if measured with Cumulative Abnormal Returns, and about 39% if measures by Buy-and-Hold Returns) and after two years from the IPO date (CAR 45%, BHR 39%). This result suggests a potential conflict of interest between the responsibility of the financial analyst towards her clients to issue accurate reports and the incentive to benefit the companies that are clients of the intermediary for which they work, whereas it seems not to be consistent with the alternative hypothesis of information advantage, given the poor performance of the IPO that they recommend.

Exit Strategies of Venture Capitalists in Hot Issue Markets: Evidence from the “Neuer Markt" in Germany

In this study we analyze the IPO exit behavior of venture capitalists (VCs) in the Neuer Markt, the former market for young growth companies in Germany. We find empirical evidence that VCs were able to time their exit quite successfully in the primary market and to some extent also in the secondary market. The larger the number of shares being sold by the VCs at the IPO date, the lower is the IPO performance after expiration of the lock-up period. In addition, the firms that went public in the year 2000 planned their IPO too late in the stock market cycle so that--due to the mandatory lock-up period of six months--some VCs had no chance for a lucrative exit and still owned shares three years after the IPO. Thus, lock-up commitments can be quite costly for early investors particularly towards the end of a hot issue market.

Investor interest, trading volume, and the choice of IPO mechanism in France

This paper investigates the relationship between underpricing and investor interest level prior to and after the IPO date. Empirical tests show a significant 3-day buy-and-hold abnormal return of 19.15%. It is positively related to the share demand-to-offer ratio in the pre-market period and to trading volume in the aftermarket. Despite a high initial underpricing for some book-built issues, the book-building procedure allows for more effective pricing and a lower divergence of opinion among investors in the aftermarket than the auction-like procedure.

Were Insiders more Informed than the Market during IPO Bubble? Evidence from the Crossing of Legal Thresholds on the Nouveau Marche in France

This paper examines the effect of a change in the ownership of IPO's insiders on the value of firms during four years following the IPO. The changes in the ownership are deducted from the crossing of legal threshold. From a sample of 120 IPOs that took place during Internet bubble, 463 crossings of threshold were identified as events on the observation period. The market reaction to the announcement of these crossings has been studied and a buy-and-hold abnormal return has been calculated for 100 days to 500 days after the announcement. Similarly, a buy-and-hold abnormal return has been calculated for 100 days to 500 days after the IPO date according initial and subsequent sales by insiders. We find no evidence suggesting that insiders knowingly issue overvalued equity at IPO date. However, there is a weak evidence, but statistically significant, that suggests that insiders acquire private information during the first years of flotation and have the ability to take advantage of it by selling overvalued equity. The entrepreneurs seems to be the most informed on the future value of the firm. However, the changes in the ownership of banks and venture capitalists are not followed by significant change of firm's long term value.

IPO Vintage and the Rise of Idiosyncratic Risk

This paper presents empirical evidence that the recent rise in idiosyncratic risk is driven by the increasing propensity of firms to issue public equity at an earlier stage in their life cycle. We find that the age of the typical firm at its IPO date has fallen dramatically from nearly 40 years old in the early 1960s to less than 5 years old by the late 1990s. Since younger firms tend to be riskier, this systematic decline in the average age of IPOs, combined with the increasing number of firms going public over the last 30 years, has caused a significant increase in idiosyncratic risk. We show that after controlling for the proportion of young firms in the market, there is no trend in the time series of idiosyncratic risk. Moreover, we find a negative trend in idiosyncratic risk after controlling for other measures of firm maturity.