IPO Returns Research Articles

Foreign Firms Issuing Equity on US Exchanges: An Empirical Investigation of IPOs and SEOs

We analyse a sample of foreign firms issuing equity in the USA to determine the factors that affect IPO and SEO pricing. The average SEO discount, defined as the percentage difference between the price in the local market on the offering date and the SEO offer price, is 2.07%, and is significantly lower for stocks that are ultimately listed on the NYSE/AMEX than for stocks that are listed on the Nasdaq. Foreign equity issues are underpriced; the traditional underpricing discount, which is defined as the percentage difference between the closing price on the first day of trading and the offer price, is 18.75% on average. Equity issuers from industry groups with the largest six–month pre–IPO return in the US market experience a higher level of underpricing. For the subsample of emerging market issues, we document that, in the after–market, the ADR price remains persistently above the dollar denominated price in the domestic market for up to 90 days following the date of the issue.

The influence of group affiliation and the underwriting process on emerging market IPOs: The case of the Philippines

In this paper we document underpricing and aftermarket returns of Philippine IPOs, discuss specific features of the Philippine IPO market, and investigate whether differential underpricing occurs due to certification considerations or potential conflicts of interest. We find that IPO underpricing is greater in cases where the offering firm is affiliated to a family business group, specifically when these affiliated firms use a foreign lead underwriter. Our results lead us to conclude that conflict of interest problems are recognized by market participants and that these conflicts of interest lead to differential underpricing.

IPOs and Mutual Fund Returns

Recent research on mutual fund performance has ignored the impact of initial public offering on mutual fund performance. We show that the real estate mutual funds returns, at least in the 1990's, are almost entirely a function of REIT IPO returns, and that, after controlling for the REIT IPO returns, the real estate mutual funds exhibit no sensitivity to the Fama-French or momentum factors. We find that while REIT IPOs exhibited statistically significant long-run abnormal performance, real estate mutual funds did not.

Choix des cabinets d'audit et évaluation des titres introduits au second marché

Plusieurs études mettent en évidence un phénomène de sous-évaluation des titres lors d’une introduction en Bourse. Ce phénomène peut notamment être expliqué par une situation d’incertitude et d’asymétries d’information entre les différentes parties prenantes. Dans ce contexte, nous cherchons à vérifier que le choix par l’entreprise candidate d’un cabinet d’audit réputé de qualité, en signalant une information plus fiable et plus précise, permet de limiter le phénomène de sous-évaluation. À partir d’un échantillon d’entreprises introduites sur le second marché français, nos résultats corroborent l’hypothèse d’une relation inverse entre la réputation du cabinet choisi et le niveau de sous-évaluation des introductions. Notre étude vérifie en outre l’existence d’un effet significatif du choix d’une banque réputée sur le niveau de sous-évaluation.

The post-offering performance of IPOs in the health care industry

This paper investigates the post-offering performance of initial public offerings in the health care industry in a sample of 223 IPOs issued between 1985 and 1996. Statistically insignificant abnormal returns for IPOs relative to matched control firms and risk-adjusted health care index are evident for the whole sample. Thus, our empirical results support the overall information efficiency in the IPO market. However, numerical and statistical differences of the IPOs’ abnormal returns are documented in every subgroup specified according to the issuance years and sectors. We conjecture that such differences are due to the growing threat of government intervention and the significant structural changes.(JEL11, C11)

Board ownership and IPO returns

This study examines the role of the board of directors for IPO pricing irregularities. Theory suggests that initial underpricing may be the result of asymmetric information and the long-run underperformance may be the result of managerial mismanagement of new funds due to agency conflicts. A strong board of directors can potentially reduce both asymmetric information and agency problems. We find that the structure of the board is related to IPO pricing anomalies. Initial returns are directly related to share ownership by insiders and the percentage of independent outsiders, and long-run returns are directly related to share ownership by insiders.

Does the Presence of Venture Capitalists Improve the Survival Profile of IPO Firms?

The role of venture capital in the creation of the public corporation is now widely recognized. This study investigates whether venture capitalists add value to the going public process by improving the survival profile of IPO issuers. The survival of IPO issuers is not only likely to depend on managerial actions but also on the effectiveness of key market participants such as investment bankers and analysts. The form and function of the venture capital industry allows venture capitalists to influence the actions of managers, investment bankers, and analysts, and attract institutional interest. Conducting survival analyses using the Cox hazard methodology, we find that the involvement of venture capitalists improves the survival profile of IPO firms. Several other variables that are potentially influenced by VC involvement like R&D allocations, analyst following, investment banker prestige, and success on road shows are also positively related to the survival time of IPO issuers.

Re‐assessing the long‐term underperformance of UK Initial Public Offerings

Previous work has identified that IPOs underperform a market index, and the purpose of this paper is to examine the robustness of this finding. We re‐examine the evidence on the long‐term returns of IPOs in the UK using a new data set of firms over the period 1985–92, in which we compare abnormal performance based on a number of alternative methods including a calendar‐time approach. We find that, using an event‐time framework, there are substantial negative abnormal returns to an IPO after the first 3 years irrespective of the benchmark used. However, over the 5 years after an IPO, abnormal returns exhibit less dramatic underperformance, and the conclusion on negative abnormal returns depends on the benchmark applied. Further if these returns are measured in calendar time, we find that the (statistical) significance of underperformance is even less marked.

Why Do (or Did?) Internet-Stock IPOs Leave So Much 'Money on the Table'?

The economy advent and the Euro's arrival have given energy to EU stock markets. Even though late with respect to the US and the UK, the number of firms going public on these has considerably increased, even as a consequence of the birth of new pan-European second markets. Most IPOs resulted in huge short-run returns, compared to the offer price. The initial underpricing has been particularly manifest for firms whose products and service pertain to high-tech sectors, and distinctively to the Internet world. Yet, a substantial correction in stock prices has occurred in 2000 driven by investors' concerns about Internet companies' cash flow deficits. Many firms have been induced to delay their offerings, and the offer prices were revised downward either by the issuers or by the market with mortifying initial returns. In this paper we analyze a survey of Internet stock IPOs, listed on the Euro's secondary Stock Exchanges. The sample is made up by 86 IPOs, listed on the EASDAQ and EURO-NM from 1/1/1999 to 1/5/2000. We find an initial average return equal to 76.43%, i.e. the first-day offer price is much higher than the offer price. More than 4.6 billion euro were on the table by the IPOs issuers (54.3 million euro on the average). We aim at investigating why Internet-stock IPOs leave (or just left ?) so much money on the table. We find that the initial underpricing is strongly related to the information gathered during book building activity in the pre-selling period, which drives the revision of the prospectus price range and signals the IPO quality to uninformed investors. In fact, when the offer price is equal to the maximum price in the ex-ante file range the mean underpricing is equal to 93.71% while it is negative when the offer price is equal to the minimum price. By focusing on Italian Internet companies IPOs we also verify that IPOs underpricing does not annoy the issuers, since they discover to be much wealthier than expected, coherently with the prospect theory by Loughran and Ritter (2000). Finally we find that the initial return is driven by a number of determinants: it is positively related to the market momentum but negatively related to the density of IPOs in the same national market during the 30 days before the offering, consistently with the hot issue markets theory. Interestingly, accounting data from the prospectus about sales and profits seem to force the initial underpricing, too. The dilution of insiders' ownership is not recognized as a significant determinant. We argue that the remarkably high initial return of Internet stock IPOs in Euro-land is related to Internet euphoria, but also to the limits of traditional evaluation methods adopted by intermediates in determining the offer price. J.E.L Classification codes: G30, G32.

Abnormal returns of thrift versus non-thrift IPOs

This paper examines the issue of underpricing for converting thrift institutions. Evidence has found this underpricing to be pervasive in the mutual-to-stock thrift conversion process. The issue is of importance given the debate over whether any windfall gains should accrue to depositors, managers, or taxpayers. An event study is conducted to determine if there is a significant difference between the initial returns of thrift and non-thrift IPOs. Our overall results indicate that a significant difference does exist.

Evidence on Price Stabilization and Underpricing in Early IPO Returns

Using data on 560 firm‐commitment initial public offerings of common stock for the 1982–1983 period, we find that the cross‐sectional distribution of one‐day returns is modeled better as a mixture of two distributions, with the parameter estimates of one distribution being consistent with underpricing and the other with price stabilization. Further, the evidence that early IPO returns are drawn from a mixture distribution persists for at least four weeks. The implications of these results for the analysis of IPO returns are illustrated by examining the influence of a measure of ex ante price uncertainty on IPO pricing.

The Nature and Persistence of Initial Public Offering Aftermarket Returns Predictability

This paper examines the predictability of monthly aftermarket returns of initial public offerings during the first six years of trading. Predictability is tested under the null hypothesis of random walk using a Markov chain analysis. The evidence shows that excess returns of IPOs (adjusted for the return on the equally weighted NASDAQ index) demonstrate non-random walk behavior through the first five years of trading and random walk behavior in the sixth year. This is accompanied by predictability of monthly excess returns conditioned on the two previous months' excess returns. A trading strategy is offered to capitalize on the predictability patterns. Implementing the trading strategy is not possible due to institutional barriers, providing additional explanation for why IPOs do not reach their intrinsic values for extended periods of time.

European IPO Markets: The Post-Issue Performance Imperative

European secondary markets appear to have so far failed as providers of capital for emerging growth companies. Conventional explanations focus on the supply side of the market, blaming over-regulation, complex listing requirements, the absence of an equity culture, weak competition between national markets, and a shortage of growth companies. This paper highlights significant underperformance in long-term IPO returns in European markets, possibly affecting demand by Investors. Alternative demand-side factors, such as constraints on Institutional investments in small cap stocks and the consequent lack of supporting analysts, and methodological Issues in measuring long-term performance, are also discussed.

The Pricing of Initial Public Offers of Corporate Straight Debt

ABSTRACTThis study examines the initial‐day and aftermarket price performance of corporate straight debt IPOs. We find that IPOs of speculative grade debt are underpriced like equity IPOs, while those rated investment grade are overpriced. IPOs of investment grade debt are typically issued by firms listed on the major exchanges and underwritten by prestigious underwriters. In contrast, junk bond IPOs are more likely to be handled by less prestigious underwriters and are typically issued by OTC firms. Our analysis also reveals that bond rating, market listing of the firm, and investment banker quality are significant determinants of bond IPO returns.

The Pricing of Initial Public Offers of Corporate Straight Debt

This study examines the initial-day and aftermarket price performance of corporate straight debt IPOs. We find that IPOs of speculative grade debt are underpriced like equity IPOs, while those rated investment grade are overpriced. IPOs of investment grade debt are typically issued by firms listed on the major exchanges and underwritten by prestigious underwriters. In contrast, junk bond IPOs are more likely to be handled by less prestigious underwriters and are typically issued by OTC firms. Our analysis also reveals that bond rating, market listing of the firm, and investment banker quality are significant determinants of bond IPO returns.

Reputation and Financial Intermediation: An Empirical Investigation of the Impact of IPO Mispricing on Underwriter Market Value

This paper investigates the empirical significance of underwriter reputation capital by analyzing the impact of initial returns of IPOs on lead-underwriter market value. Consistent with reputation costs, overpriced offerings are associated with a decrease in lead-underwriter market value significantly in excess of estimated direct costs. For moderately underpriced offerings, however, underwriter wealth effects are positive. Consistent with higher reputation costs, these wealth effects are insignificant when the IPO underpricing is more extreme. In jointly managed offerings, it is lead-underwriters that are primarily affected by IPO initial performance.Journal of Economic LiteratureClassification Numbers: G24, G32.

Australian IPO pricing in the short and long run

We analyse both initial underpricing and post-listing returns for Australian IPOs. Our results are consistent with the view that unique institutional characteristics may have overwhelmed previous Australian tests of equilibrium models of IPO underpricing. The results also show that Australian IPOs significantly underperform market movements in the three-year period subsequent to listing. Further investigation of these anomalous post-listing returns lead us to reject various ‘speculative bubble’ explanations. Rather, the evidence suggests a curvilinear relationship between initial and subsequent returns, although the economic significance of the relationship is low.

An empirical investigation of IPO returns and subsequent equity offerings

Several recent papers present signaling models in which firms underprice their initial public offerings of equity (IPOs) so that they can subsequently issue seasoned equity at more favorable prices. We test the implications of these models. We find a positive relation between IPO underpricing and the probability and size of subsequent seasoned offerings. Although these results are consistent with the implications of the signaling hypotheses, the economic significance appears weak. We conduct additional tests to evaluate other explanations for these findings and find the alternatives more compelling.

Initial Public Offerings and Underwriter Reputation

ABSTRACTThis paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of “informed” activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns.