IPO Returns Research Articles

How Much Do REITs Pay for Their IPOs?

Previous studies have documented the reversal in the initial returns of REIT IPOs from overpricing in the 1980s to underpricing in the 1990s. We find that the gross spreads of REIT IPOs decreased significantly in the 1990s. In particular, there is a bimodal clustering for gross spreads at 6.5 and 7.0%. Moreover, in the 1980s around 94% of REIT IPOs had integer offer prices, most of which were priced at either $10 or $20. However, the proportion of integer offer prices decreased to 64% in the 1990s. Higher gross spreads, overpricing, and high frequency of integer offer prices for REIT IPOs in the 1980s are consistent with the marketing hypothesis that in the 1980s REIT IPOs were mainly marketed to less-informed individual investors. Our results explain the dynamic process employed by underwriters in the setting of gross spreads and the pricing of REIT IPOs as a new financial product in response to various structural changes in REITs.

Underpricing, Stabilization, and Governance: Sound and Fury Signifying?

Smart and Zutter (2005) recently published a paper on SSRN purporting to challenge the initial IPO return evidence in Arugaslan, Cook, and Kieschnick (2004), and especially the mixture distribution hypothesis. Unfortunately, Smart and Zutter misrepresent the arguments in Arugaslan, Cook, and Kieschnick. Further, they do not appear to understand the assumptions underlying the statistical models at issue, nor how to test those assumptions. We address the issues raised by their paper, in part to clarify what evidence might be used to reject the mixture distribution hypothesis.

Assets in Place, Growth Opportunities, and IPO Returns

We consider a simple model positing that initial public offering price is equal to the present value of an entity's assets in place and growth opportunities. The model predicts that initial return is positively related to both the size and risk of growth opportunities. Consistent with this prediction, we find initial return to be positively related to both the fraction of the offer price that is accounted for by the present value of growth opportunities and various proxies of issue uncertainty. We also find that IPO investors equate one dollar of growth opportunities to approximately three quarters of tangible assets.

Assets in Place, Growth Opportunities, and IPO Returns

We consider a simple model positing that initial public offering price is equal to the present value of an entity's assets in place and growth opportunities. The model predicts that initial return is positively related to both the size and risk of growth opportunities. Consistent with this prediction, we find initial return to be positively related to both the fraction of the offer price that is accounted for by the present value of growth opportunities and various proxies of issue uncertainty. We also find that IPO investors equate one dollar of growth opportunities to approximately three quarters of tangible assets.

The Underwriter Persistence Phenomenon

This study presents new evidence that initial IPO returns have persistent underwriter-specific components. These components cannot be explained by existing measures of underwriter quality, underwriter service, or controls for several known predictors of initial IPO returns. Tests that trace the roots of persistence most broadly support theories of asymmetric information among underwriters. I present such a model, and consistent with its predictions, I find that high underpricing underwriters (1) are responsible for a majority of the partial adjustment phenomenon, (2) make more informed analyst revisions, (3) experience superior market share growth, and (4) are more likely to serve institutional clientele.

A Theory of IPO Underpricing, Issue Activity, and Long-Run Underperformance

We present a dynamic model of an IPO market in which firms go public to raise capital for investment. The original shareholders have inside information with respect to the quality of their firm's investment opportunities, and they decide whether to go public, how much capital to raise and invest, and how to price the IPO. Outside investors are of one of two types: some investors know and understand even the not directly observable economic incentives of the original shareholders, whereas all other investors learn about the IPO market only from the publicly observable IPO market data. Market participation by the latter investors can upset the stationary rational equilibrium and give rise to a dynamic equilibrium that is characterized by: (1) IPO underpricing, (2) underperformance of IPO shares in the long run, and (3) cyclical variations in IPO volume. Learning investors upset the stationary equilibrium not because of ex ante unreasonable beliefs, but because they fail to condition their beliefs on variables that convey only redundant information in the stationary equilibrium. The model provides a joint explanation for the three empirically documented IPO market anomalies, and it yields a number of new testable empirical predictions.

The Factors Affecting on IPO Return in Thai Stock Market

An alternative for a short-term investment, IPO return is one of the most attractive investments in every stock market. In the past Stock Exchange of Thailand, the rate of stock listing or IPO issue is less when compare to the other markets and the number of overpriced firms less than number of under priced firms. After the crisis period in 1997, the number of IPO issues is reduced to almost zero for a few years. Then SET has implemented the new regulation and procedure to control all listed and will be listed companies and also pursue them to be corporate governance. Nowadays 2004, the rate of stock listing increase to almost one a week, in the other words there is an IPO issued every week and the number of positive return IPO also increase. This study reported 14% to 24% IPO Returns in Thai stock market in given period. This figure is same with international Stock markets. In addition to that the factors affect the initial return of IPOs also disclosed. By using the publish data that can be acquired by general investor, we investigate those data which have relations to the return of IPOs. Finally, develop and test the initial return prediction model.

Earnings Management and Delisting Risk of Initial Public Offerings

Earnings management is a corporate decision subject to costs. Both earnings management in the IPO process and the ex ante delisting risk of newly issued firms are related to firm fundamentals. With a sample of IPOs from 1980 to 1999, we find that the degree of earnings management possesses significant predictive power on IPO failure. IPO firms associated with aggressive earnings management are more likely to delist for performance failure, and tend to delist sooner. Furthermore, we find that IPO firms associated with conservative earnings management are more likely to be merged or acquired and they earn positive abnormal returns. Our results also show that IPO issuers manage earnings in response to market demand. Market-wide earnings management of IPO firms interacts with the IPO cycle documented by Lowry and Schwert (2002).

Post-IPO Flipping and Turnover: Predictive Factors for Long-Run Returns

I show that, consistent with Krigman, Shaw, and Womack's (1999) findings on flipping activity, one-year IPO returns are predicted by first-day flipping activity. That is, when block flipping is low, returns are high. I extend their flipping methodology to incorporate the information through the end of the quiet period (25 calendar days after the IPO) and show that flipping during this period is even more informative than the first-day signal. In addition, I find that a higher average relative level of turnover to the end of the quiet period (volume as a percent of shares offered) is significant in predicting higher one-year stock returns beginning after the quiet period. Finally, in examining the time series of flipping from 1993 through 1999, I show that Depository Trust Company's (DTC) IPO tracking system which began in 1997 has had a substantial impact on lowering the amount of subsequent flipping.

Negotiation and the IPO Offer Price: A Comparison of Integer vs. Non-Integer IPOs

AbstractWe investigate the pricing of 4,989 equity IPOs with offer dates between 1981 and 2000. Approximately three-fourths of these IPOs have integer offer prices. Average initial returns for IPOs with integer offer prices are significantly higher (24.5%) than those priced on the fraction of the dollar (8.1%). This result is robust through time and after conditioning for other effects known to influence initial returns. We hypothesize that integer vs. fractional dollar IPOs are the result of negotiations between the issuing firm and underwriter. Under this negotiation hypothesis, the frequency of integer pricing should be an increasing function of the offer price and the degree of uncertainty surrounding the value of the firm. Empirical evidence, supportive of the negotiation hypothesis, is presented.

How much do REITs Pay for Their IPOs?

Previous studies document the reversal in the initial returns of REIT IPOs from overpricing in the 1980s to underpricing in the 1990s. We find that the gross spreads of REIT IPOs decreased significantly in the 1990s. In particular, there is bimodal clustering at the 6.5% and 7.0% levels. Moreover, in the 1980s approximately 94% of REIT IPOs had integer offer prices, most of which were priced at $10 and $20. However, this proportion decreased to 64% in the 1990s, which indicates the change in REIT pricing uncertainty and negotiation between issuers and underwriters. We attribute the reversal of the gross spreads and initial returns of REIT IPOs to REIT structural changes and the learning process for underwriters in setting the gross spreads and pricing the REIT IPOs as new financial products.

Venture Capital Investments by IPO Underwriters: Certification, Alignment of Interest or Moral Hazard?

We study IPO pricing when underwriters are venture capital investors in issuers and test three hypotheses concerning the effects of underwriter share ownership on the IPO underwriting and pricing processes. We find that venture investments by underwriters significantly reduce IPO underpricing; and the result is stronger for lead underwriters. This evidence is consistent with both underwriter certification and improved underwriter alignment of interests with issuers. The fall in underpricing is substantially greater when there is greater uncertainty about IPO valuation, which further supports the underwriter certification effect. Controlling for endogeneity effects does not change our conclusions. Finally, lead underwriter venture investment in IPO issuers also reduces underwriter gross spreads. Overall, the evidence is consistent with an underwriter certification effect and to a lesser degree an underwriter-issuer alignment of interest effect and inconsistent with an IPO conflict of interest effect.

IPO Underpricing, Issue Mechanisms, and Size

This paper studies the pricing of IPOs in the Indian context. The paper also examines whether the introduction of Bookbuilding has an impact on IPO pricing. The results suggest that IPOs are underpriced. The results also suggest that bookbuilt IPOs show less underpricing than fixed price issues. A more detailed study suggests that this has to do more with the size of the issue than the issue process. A model describing the IPO process in the presence of asymmetric information and heterogenous beliefs is presented. This model suggests that IPO underpricing can be avoided in the presence of selectively informed investors. The model includes the choices on signaling cost, homogenous and heterogeneous beliefs among the investors, entrepreneur holding dilution and issue size that exist for a firm while coming for an IPO. The model suggests that a larger amount of money is left on the table if the entrepreneur holds a lesser amount with herself post IPO. Despite asymmetric information, the high value firm can place an issue without leaving money on the table. The model also suggests that IPO underpricing is unavoidable in a market with information asymmetry and homogenous beliefs among investors. The models predict that underpricing is more severe in the case of smaller issue sizes. This is consistent with the empirical findings.

French IPO Returns and Subsequent Security Offerings: Signaling Hypothesis Versus Market Feedback Hypothesis

In this article, we look at two competing hypotheses to explain IPO underpricing in France when a seasoned offering follows the IPO. The first hypothesis assumes that the initial underpricing is a signal from a high quality firm in the anticipation of a subsequent equity issue at a higher price. The second competing hypothesis assumes that the market transmits to managers their valuation of the company. Our database examines two types of subsequent risky issuances: on the one hand, stocks and on the other hand, hybrid issuances (such as convertible bonds, bonds with attached warrants, and stocks with attached warrants). Further, in the French market, firms may be introduced through different mechanisms, which are not equally compatible with both hypotheses. We show that the initial underpricing is greater if a stock issuance rather than other security offerings of a convertible nature subsequently follow the IPO. We find evidence in favor of the signaling hypothesis in the case of fixed price IPOs. For the auction-like procedures, we show that the initial investors' demand, rather than post-IPO performance, determines the type of security that is issued, but has no effect on the financing decision itself. The market feedback hypothesis is therefore only weakly supported: a poor market message does not keep managers from expanding, but rather encourages them to use stage financing rather than straight equity.

Empirical Study on Post-IPO Long-run Performance in the Chinese Stock Market

It is testified that there exists poor post-IPO long-run performance in many stock markets. This paper examines Chinese IPOs' long-run performance based on the data of IPOs in the Chinese stock market. In this study, the empirical methods of style matched portfolios and Fama-French three-factor model are employed. It is found that IPOs' long-run performance is better than that of matched non-IPOs in Chinese stock market, and the abnormal returns of IPOs cannot be reasonably explained by F-F three-factor model. In addition, the long-run performance of IPOs is related with their first day returns.

Hot Issues, New Economy Stocks and Australian Industry IPO Returns in the Late 1990s

This paper analyses Australian IPOs at an industry level for the period 1994 to 1999. We find a significant relationship between capital weighted IPO industry returns and contemporaneous index returns suggesting that capital raising and money left on the table arguments matter. We do not find any hot issue years at an industry level. Further at an industry level we find that new economy listings are not different to listings from other sectors of the economy.

Does Underwriter Reputation Affect the Performance of IPO Issues?

In this paper we examine the relationship between performance of the Chinese IPO firms and the reputation of investment bankers underwriting their stocks. Similar to previous studies on well-developed stock markets, we find that the initial return on the first day of trading is strongly positive for Chinese IPO stocks due to underpricing. This initial return is negatively related to the underwriter's reputation, suggesting that the better the reputation of the underwriter, the less underpricing and hence, the lower the initial return of the IPO stock. Extending the analysis to a ten-day window after the first trading day, we find that the cumulative return becomes negative but that stocks with more prestigious underwriters experience less decline. We also examine the three year return of the IPOs. Contrary to previous findings, we find a positive long-run return for the Chinese IPO stocks. This long-run return is positively correlated with underwriter reputation. Finally, we find some evidence of positive long-run operating performance for the IPO firms that employ more prestigious underwriters.

Auctions versus book building of Japanese IPOs

With the spread of U.S.-style book building, auctions have become less popular as IPO pricing mechanisms in the world. Does book building provide a better mechanism for issuing firms than auctions? Japan provides an interesting laboratory to compare investor-priced IPOs using price-competitive auctions with those of underwriter-priced IPOs using book building. Our analysis finds that, after controlling for ex ante uncertainty variables and other issue and company variables, the initial returns of book building IPOs are significantly higher than those of auctions, especially during hot markets. IPO firms “left more money on the table” using book building compared to auctions.

Investor Response to Sell-Side Analyst Revisions in IPO Recommendations: Do They Correct Expectations?

This paper tests for investor optimism in IPO firms by examining excess returns around sell-side-analyst revisions of recommendations. I pose the corrections hypothesis and the learning hypothesis. According to the corrections hypothesis, if investors correct their initially optimistic expectations, they should react more negatively to analyst upgrades and downgrades of IPO firms relative to benchmark non-IPO firms. A competing hypothesis is the learning hypothesis, which posits that investors should respond more positively to upgrades and more negatively to downgrades of IPO firms relative to benchmark non-IPO firms, because they learn more from all information events about new, immature firms. Examining benchmark performance-adjusted-excess-returns around all revisions issued in the first 3 years after IPO issue, I find that investors do learn more from analyst revisions for IPO firms. However the magnitude of the response to upgrades and downgrades is asymmetric. The negative response around downgrades dominates the positive response around upgrades. Overall, the abnormal return in the 3-days around all revisions is -1.80%. This correction is economically significant, and contributes 15.67% to the long-run underperformance of IPO firms. This result is robust to different specifications of benchmark firms.

Negotiation and the IPO Offer Price: A Comparison of Integer versus Non-integer IPOs

We investigate the pricing of 4,523 initial public offerings of common stock with offer dates between 1981 and 2000. Our study documents that approximately three-fourths of IPOs have integer offer prices. Average initial returns for IPOs with integer offer prices are significantly higher (25.5 percent) than those priced on the fraction of the dollar (8.1 percent). Higher initial returns for integer offerings are observed for 18 of the 20 years of our study and over various ranges of offer prices. Initial returns for integer and fractional IPOs are similar for the subsample of offerings priced below the original filing range. However, significant differences are found for IPOs priced within and above the filing range. For instance, the average initial return for integer offerings priced above the filing range is 65.5 percent compared to 19.9 percent for those priced on the fraction of the dollar. Similar to the arguments made by Harris (1991), we hypothesize that integer versus fractional dollar IPOs are the result of negotiations between the issuing firm and underwriter. Under the negotiation hypothesis, the frequency of integer pricing should be a positive function of the offer price and uncertainty. With greater uncertainty, the extent of underpricing for integer offerings should be higher than for fractional offerings as the investment bank seeks to manage its underwriting risk. We present evidence supportive of the negotiation hypothesis. Specifically, we observe that the frequency of integer prices for the sample of IPOs priced at $15 and above is about twenty percentage points higher than for those IPOs priced below $10 per share. We also document that both the cross-sectional standard deviation of initial returns and the ex-post standard deviation of daily stock returns is highest for offerings priced on the dollar. This higher level of uncertainty for integer offerings is consistent with their high degree of underpricing.