IPO Pricing Research Articles

Political power, local policy uncertainty and IPO pricing

Greater partisan alignment among lawmakers enhances their ability to respond rapidly to adverse shocks, but it also undermines the quality of checks and balances and encourages excessive governmental intervention in local areas aligned with the ruling party. We investigate how this form of local policy risk affects IPO underpricing. One standard-deviation increase in political alignment between local politicians and the federal government translates into an extra $1.58 million being left on the table, which corresponds to 5.39% of the average valuation discount. This effect is concentrated in firms that are vulnerable to legislative interventions and has important long-term implications. Our robustness analysis also shows that our baseline results are not sensitive to the inclusion/exclusion of influential states and years with high IPO activity.

Underwriters’ price support regulation and institutional investors’ trading: The case of the putback option

We examine a period in Korea during which a price supporting regulation called the putback option was imposed on the IPO underwriter. Under the regulation, individual investors of IPO had put options which can be exercised at 90% of IPO price. We find that during the regulation period, institutional investors’ flipping activity is evident not on the days following the IPO but on the days following the expiration of putback option. Our study shows that the regulation results in merely delaying the institutional investors’ documented trading behavior and provides evidence that the relationship between the underwriter and the institutional investors affects the trading of institutional investors.

Local IPO waves, local shocks, and the going public decision

AbstractLocal IPO waves occur when firms from different industries, but located in the same area, go public in the same time period. We classify IPOs within industry IPO waves and within local IPO waves, and see that the sub‐samples of IPOs on the wave by industry only slightly overlap IPOs on the wave by region; IPO waves by region are similar to IPO waves by industry: for example, early‐in‐the‐wave IPOs are equally more underpriced than late‐in‐the‐wave IPOs. We also find the listing decision is sensitive not only to high valuations of firms in the same industry but also to high valuations of firms in the same region but in different industries. Our results do not support information spillover as a driver of local IPO waves, as the post‐IPO fall in profitability is more pronounced for on‐the‐wave than for off‐the‐wave IPO firms and the IPO price revision is not sensitive to the information revealed by concurrent IPOs. Using a difference‐in‐difference approach, we show that regions hosting IPO waves experience a parallel increase in several economic ratios post the wave. Overall, our results provide support to local IPO waves originating in positive local shocks.

Social Media Sentiment and IPO Pricing

This study attempts to examine the impact of social media attention and sentiment on IPO pricing. Specifically, by using social media sentiment as a proxy for retail investors’ valuation, I attempt to examine the theoretical predictions in prior studies (Ljungqvist, Nanda and Sigh (2006), Cornelli, Goldreich, and Ljungqvist (2006), and Derrien (2005)) that overoptimism of sentiment investors leads to initial overpricing of IPO followed by long-term reversal. Using posts on Stocktwits during pre-IPO period, I have constructed measurements of investor attention and sentiment. The empiri- cal results are generally consistent with the theoretical predictions that retail investor overoptimism leads to higher IPO first day price run up and worse long-term perfor- mance. Additionally, using machine learning techniques to classify untagged posts, I have found similar results when sentiment measures are constructed by classified un- tagged posts. Results with sentiment measures constructed by these classified posts imply that more optimistic sentiment leads to a higher turnover rate shortly after IPO, indicating that informed investors are selling overpriced IPO shares to sentiment retail investors.

Usefulness of earnings announcements and other news: Evidence from the impact of peer information on IPO price revision

We study the relative usefulness of earnings announcements for valuation from the perspective of information externalities–the use of peer information in IPO pricing. The relative usefulness of an information source for peer valuation is a function of both the amount and the per-unit usefulness of the information. While prior research suggests that a firm’s earnings announcements supply a modest amount of incremental information, we find the per-unit usefulness of peer earnings announcements to be higher than other news in IPO pricing. Specifically, using stock returns around (outside) earnings announcements to capture earnings (other) information (e.g., Ball and Shivakumar 2008), we find that a 1-percent change in peer valuation caused by earnings announcements results in approximately 60 percent larger IPO price revisions than a 1-percent change in peer valuation caused by other information. High accounting comparability and reporting quality of peer firms further improve the per-unit usefulness of peer earnings announcements. IPO issuers also avoid setting their offering dates to immediately precede peer earnings announcements, suggesting that these are important information events.

ESG and the Pricing of IPOs: Does Sustainability Matter

The IPO process involves a large amount of information delivered to the public through different means. Information frictions may be what causes most of the underpricing. Socially conscious investors supposedly use the ESG criteria to check for potential investments. Thus, we argue that disclosing more ESG information in the S-1 prospectus diminishes the information asymmetry between the company and the investors, positively benefiting the companies’ financial performance, here in terms of lower underpricing and evaluation. Based on a sample of 783 U.S. IPOs we compute a text-based measure of ESG dislosure in IPOs. Our results show that (a) the amount of ESG disclosures in the S-1s is negatively associated with IPO’s underpricing and Tobin’s Q; (b) this effect is primarily driven for the underpricing by the ESG as a whole, as well as for the price revision. Our analyses show instead that when considering Tobin’s Q investors value at most the governance part of sustainability.

IPO Underpiricing, Konservatisme Akuntansi, dan Sentimen Investor

Abstract. The significant increase of stock price compared to its IPO price is difficult to explain. Companies which issue their stock are impossible to set underpriced IPO voluntarily, while investors who buy an overpriced stock are only they who are not rational or lack of information. Conservative financial statements and high accrual quality provide an opportunity for all investors to be able to estimate the fair price of IPO shares so that the disagreement among investors is not too wide and price fluctuations due to speculation are not too high in the secondary market. Using Indonesia Stock Exchanges, the results show that influence of accounting conservatism and accrual quality are stronger in the 30 holding period after the IPO because the uncertainty of financial statement information led to wider speculation opportunities in the long period. The rise in stock prices after IPO is also influenced by investor’s sentiment and market conditions Keywords: IPO, underpricing, accounting conservatism; accrual quality, investor sentiment

Health Silk Road 2020: A Bridge to the Future of Health for All

Health Silk Road 2020: A Bridge to the Future of Health for All

Social Capital and the Pricing of Initial Public Offerings

Using a sample of 4,892 IPOs in the United States from 1990 to 2019, we establish that the level of social capital in the county of the IPO firm’s headquarters is negatively associated with the level of IPO underpricing. The relation holds for a range of robustness tests, including those addressing endogeneity. Additionally, the relation is weaker among IPO firms with less information uncertainty, and stronger for IPO firms with more agency problems. Overall, our results demonstrate the importance of social capital as an informal contracting mechanism in enhancing the pricing and performance of IPOs.

Analysis of Stock Pricing Factors

With the development of commodity economy and its productive forces, a product-stock is obtained. European securities market has formed a complete system, but Chinese stocks themselves have the characteristics of “controlling more with less” in trading. Because legal person shares and state-owned shares promise not to circulate when they are listed, each share is only tradable shares traded according to the stock price in the market, but the index is calculated according to the weighted total share capital. Therefore, the pricing of new shares listed in China still has some problems such as high underpricing and unreasonable listing price, which itself has non-market problems. Theoretically, company potential, development prospect, stock market status, number of issues, etc. may all become the influencing factors of IPO pricing. In order to prevent speculation and stabilize the stock market, it is necessary to analyze the pricing factors of new shares. Nowadays, stock pricing determines the equilibrium of stock market, and there are many factors that affect the pricing of new shares, which are divided into ontological factors and environmental factors in this study. Ontological factor It is the influencing factor of the issuance price when the stock issuer operates and manages internally. There are many kinds of environmental factors, such as the overall economic situation, policies, industries and so on. As an emerging market, the regulatory concepts and rules, investor maturity and intermediary service capabilities of China’s capital market are constantly improving. The pricing mechanism of new shares is still being adjusted and improved. In view of this, this paper will analyze various factors that affect the pricing of new shares and use principal component analysis to reveal the relevant variables that affect the pricing level, sort out their importance, and put forward corresponding suggestions.

English

Despite in recent years the impact of market sentiment on the performance of listing firms has gained increased attention from academics and professionals, a research question that remains uncovered deals with how the retail investor sentiment and attention might impact the IPO pricing in the primary market. This analysis proposes a stochastic frontier model approach on a sample of 412 US firms listed between 2010 and 2016. The main research questions aim at revealing the effects that the number and the sentiment of the Tweets in the 3 months prior to each IPO produce in terms of the distance between the maximum achievable price and the actual offer price of the stocks. Results show that the more favorable the sentiment, the closer the offer price is set to the maximum achievable to the benefit of the issuer; on the contrary, negative sentiments seem to play no effect on the pricing, supporting the idea that investors are net buyers of attention-grabbing news. The number of Tweets shows no effect as well. Few and good is then the desirable attention and sentiment that issuers should wish for their listing firms.   Key words: Initial public offering, sentiment, investors’ attention, underpricing, social media.

Strategic Timing of IPOs and Disclosure: A Dynamic Model of Multiple Firms

We study a dynamic timing game between multiple firms, who decide when to go public in the presence of possible information externalities. A firm's IPO pricing is a function of its privately observed idiosyncratic type and the level of investor sentiment, which follows a stochastic, mean-reverting process. Firms may wish to delay their IPOs in order to observe the market reception of the offerings of their peers. We characterize the unique symmetric threshold equilibrium, whereby pioneer firms with high idiosyncratic types endogenously emerge. The results provide novel implications regarding variation in IPO timing, sequential clustering, IPO droughts, the composition of new issues over time, and how IPO volume fluctuates over time. These include, among others, that in more populated industries, a lower proportion of firms emerge as industry pioneers, but follower IPO volume is intensified. Additionally, heightened uncertainty over investor sentiment exacerbates delay and leads to lower IPO volume.

Research on the Reasonability of IPO Pricing and the Causes of High Return under the Registration System of the STAR Market

The problems of inflated pricing and excessive returns of new shares on the Chinese stock market have been widely criticized by the market, and have been attributed to the imbalance between supply and demand caused by the control of the number and scale of issuing companies by the approval system. Therefore, with the establishment of the STAR Market, the registration system of the pilot is expected to improve the supply-demand relationship and the pricing efficiency. However, judging from the practice in the past year since the opening of the STAR Market, the IPO price, the initial P/E ratio and the return rate of the new shares have repeatedly set new highs on China’s stock market. The problem once again aroused the concern and worries of all parties. In order to investigate the rationality of IPO pricing of STAR companies under the registration system, this article adopts reverse engineering thinking first based on whether IPO pricing can effectively reflect the company’s intrinsic value, and uses the prospectus and the underwriter’s IPO data when the IPO price is known. Combining with the STAR Market attribute variables, we use the stochastic frontier model to calculate the potential effective frontier price. This price is an unbiased estimate of the intrinsic value, so as to determine the rationality of IPO pricing and its relationship with the effective frontier. Firstly, it is found that there is a significant lower boundary on IPO pricing, which indicates that there is no underpricing problem like mature markets but a significant overvaluation relative to its intrinsic value, with an overvaluation degree of 63.7%. A relatively high bubble appears in the issuance price of new shares. Therefore, it is not unreasonable to worry about the falsely high initial price of STAR companies. Secondly, we also test the cause of the higher return rate of new shares after the listing of companies. It is found that investors in the secondary market are obviously not paying enough attention to important indicators such as company fundamentals, technological innovation attributes and the other important indicators. The irrational speculation is still serious. This is the important reason for the stock price bubbles and the high returns on the secondary market. The research in this article shows that there are still major deficiencies on the pricing ability, self-restraint and the maturity level of investors for financial intermediaries and issuers. Therefore, the quality of research reports on the investment value to underwriters and the ethical restraint on issuers, underwriters and institutional investors should be the focus of the supervisory authorities.

Review of IPO Primary Market Pricing Literature

The aim of this paper is to offer a comprehensive review of Initial Public Offering literature on the pricing and interactions that occur in the IPO primary market. Among the multitude of variables that might affect the way shares are priced and sold in new offerings, the role of previous relationships between issuing firms, investment banks, and institutional investors, i.e. key participants in the listing process, is the object of analysis in the present paper. Existing mixed evidence suggests that repeated interactions among the major players could influence the IPO results in two ways: either by reducing asymmetric information problems or by determining opportunistic behaviours which can be seen in well-known secondary market price anomalies. The originality of the paper lies in the fact that it is the first to provide a review of literature on IPO primary market dynamics, thereby highlighting the way in which relationships between key parties of an IPO shape the entire pricing process. Moreover, this study points out the importance of shifting attention to this market in order to better understand IPO pricing dynamics.

Strategic Timing of IPOs and Disclosure: A Dynamic Model of Multiple Firms

ABSTRACT We study a dynamic timing game between multiple firms, who decide when to go public in the presence of possible information externalities. A firm's IPO pricing is a function of its privately observed idiosyncratic type and the level of investor sentiment, which follows a stochastic, mean-reverting process. Firms may wish to delay their IPOs in order to observe the market reception of the offerings of their peers. We characterize the unique symmetric threshold equilibrium, whereby pioneer firms with high idiosyncratic types endogenously emerge. The results provide novel implications regarding variation in IPO timing, sequential clustering, IPO droughts, the composition of new issues over time, and how IPO volume fluctuates over time. These include, among others, that in more populated industries, a lower proportion of firms emerge as industry pioneers, but follower IPO volume is intensified. Additionally, heightened uncertainty over investor sentiment exacerbates delay and leads to lower IPO volume.

Assessing Need and Level of Agreement among Market Participants in Adopting Book Building Pricing in Nepal

This paper aims at assessing the need of book building pricing of IPOs as well as the level of agreement among market participants on its application in the context of Nepal. This study is based on a cross-sectional analysis of survey data of 71 respondents comprising 19 issue managers, 16 portfolio managers, six share registrars, 10 mutual funds, nine stock brokers and 11 retail investors, for the months of January and February 2020. Mainly, descriptive statistics and inferential statistics like one-way ANOVA have been used in the study to assess the need and level of agreement in adopting book building pricing. The study revealed that there is an urgent need of adopting book building mechanisms of IPO pricing in Nepal because the existing primary market is inefficient and there is a huge wealth loss of existing shareholders in terms of higher underpricing on equity offerings. The role of institutional investors followed by underwriters is found crucial especially to discover price band and final price i.e. cut-off price, of offerings under book building. Further, the level of agreement in adopting book building pricing in Nepal’s capital market is positive because (i) the price band is determined with the active support of qualified institutional investors, (ii) it lowers the degree of underpricing of IPOs than that of par value method, and (iii) book building help prevents „random free riders‟ from overwhelming the process of IPOs. Mainly, more active market participants, like issue managers, portfolio managers, and stockbrokers, have a high level of agreement in adopting book building pricing. The study findings associated with book building pricing are crucial and highly applicable in order to formulate policies and implementation of new pricing mechanism in Nepal. Implementation of book building pricing will contribute to reduce level of underpricing, attract real sector companies and/or foster the primary market efficiency in future.

Initial Public Offerings Chinese Style

This paper provides a survey of China’s IPO market. We examine the following key aspects of IPOs—the policy history, IPO pricing, bids and allocation, and aftermarket trading. We show that heavy-handed regulations result in suppressed IPO offer prices and high initial returns, resulting in a high cost of going public. As a consequence, investors treat IPOs as lotteries with extreme short-term returns, with little attention to the long-term. The auction selling method, however, works in the way it is supposed to. Mutual funds bid more smartly than other investors, and their advantages are unlikely to be due to underwriters’ preferential treatment. We also discuss the latest registration-system reform and examine IPOs under the new regime. Our study lends useful insights to countries beyond China as they weigh different approaches to IPOs.

Categorization Effects in Capital Markets: Evidence From Unicorn IPOs

We use the introduction of the Unicorn label to reference venture-backed firms with valuations above $1 billion to examine how firm categorization influences investor demand and retail trade activity during IPO price formation. Our findings suggest that the positive appeal associated with an IPO firm’s Unicorn categorization increases investor demand, particularly among retail investors. We find also that Unicorn categorization relates negatively to post-IPO stock performance, and that it increases the sensitivity of post-IPO stock performance to pre-IPO accounting performance. Together, our findings provide evidence that firm categorization hides category members’ individual value-relevant characteristics and causes them to assume the category’s affective tone.

Pension funds and IPO pricing. Evidence from a quasi-experiment

We exploit a quasi-experiment arising from the government-forced changes to the assets under management and investment policy of the Polish pension funds. We test whether this new regulation and its resultant demand shock on the investors' side, leads to changes in the IPO pricing and the subsequent stock's performance. We report material and a statistically significant decrease in the IPO proceeds (IPO size) in the post-treatment period equal to over 107 million PLN (34 million USD). We find no empirical evidence that the treatment had a significant effect on the first-day IPO underpricing or on the long-term underperformance. We conclude that the demand shock resulting from the pension system reform that primarily aimed at solving fiscal problems effectively eliminated the so-called ‘pension premium’ of higher IPO valuations. Thus, it indirectly impaired companies' power of raising money in the public stock market. Furthermore, we report a decrease in the average first-day IPO returns among big issuers that is consistent with the book building literature.

EVENT STUDY OF IPO IN INDONESIA: PUMP-AND-DUMP & FLIPPING STRATEGY ANALYSIS

There were three important IPO anomalies: the positive average initial return (improperly called short-term 'underpricing'), the long-term underperformance, and hot/cold IPO. The EVENT STUDY model explained the 'underpricing' based on the assumption that the underwriter sets the initial price equal to the market-perceived true value and investors were rational. IPO prices are affected by demand and supply. The idea of the model was to explore pump-and-dump and flipping patterns exhibited upon IPO anomalies event in Indonesia. Pump-and-dump is the strategy to manipulate stock prices, while flipping was stocks bought at the IPO and sold at early days ta listing date. This strategy oftentimes exhibits anomalous behavior. Some implications of this model for the IPO market were positive 1st-day initial return (IR) and a negative relation cumulative average abnormal 5-days abnormal return (CAAR-5days) for flipping strategy. The other was a relationship between underperformance cumulative average 30-days abnormal returns (CAAR-30days) and cumulative average 5-days (CAAR-5days) abnormal returns in terms of pump-and-dump strategy. Using the relation between the Characteristics (Size of issue, Board and Floating rate) and Macroeconomics Condition (Central Bank Rate, Inflation rate, USD/IDR exchange, and GDP growth), and the IR, a CAAR-5days and a CAAR-30days, this EVENT STUDY explained the existence of the pump-and-dump and flipping pattern in the Indonesian stock exchanges. The Authors implemented a multivariate analysis of variance (MANOVA) to test hypotheses regarding the effect of a three-variables dependent (the initial return, a 5-days abnormal return, and a 30-days abnormal return) into several dependent variables. Using the IPO data taken from 2015-2019, the paper found that this EVENT STUDY explained the existence of pump-and-dump and flipping patterns at the early trading of IPO stocks in the Indonesia Exchange Market.