IPO Pricing Research Articles

Regulated price and Demand in China’s IPO market

We use simultaneous equations to model the bi-directional causality between IPO initial returns and oversubscription ratios in China. We find that the causality is one-directional from oversubscription ratios to IPO initial returns in the post-reform period (2005–2015), which is consistent with a demand effect. By contrast, a demand effect did not exist in the pre-reform period (1996–2004). Our findings suggest that the 2005 reform of the IPO pricing mechanism has allowed IPO prices to be determined by market forces in China.

Impact of IPO Pricing Mechanisms on Short and Long-Run Returns in India: An Empirical Study

Impact of IPO Pricing Mechanisms on Short and Long-Run Returns in India: An Empirical Study

Price Clustering of Chinese IPOs: The Impact of Regulation, Cultural Factors, and Negotiation

ABSTRACTDuring June 2009–May 2012, the China Securities Regulatory Commission (CSRC) suspended window guidance that limits issue prices. Using this regime change as a natural experiment, we test the combined effects of regulation, culture, and negotiation on price clustering of Chinese IPOs. The proportion of IPOs priced on round number 0 increases from 42.58% during sample periods with window guidance to 79.81% during sample period without window guidance, a level similar to that reported in developed markets . Moreover, we document a connection between whole CNY pricing of Chinese IPOs and several uncertainty measures including a unique uncertainty proxy defined as the time gap between the IPO date and the listing date. Second to the round number 0, issuing firms favour number 8 that associates with fortune, particularly during sample periods with window guidance. Our findings that price restrictions limit the power of negotiations but not the influence of cultural factors contributing to the understanding of price formation process.

Do IPO filing prices reflect firm quality?

PurposePrior research suggests that institutional investors prefer higher priced stock, while individual investors prefer lower priced stock. The purpose of this paper is to examine whether the IPO filing price reflects firm characteristics that are commonly associated with quality, including size, age, earnings, underwriter reputation and venture capital backing.Design/methodology/approachThe authors used t-tests, Wilcoxon rank sum tests, logistic and ordinary least squares regressions to test the hypotheses.FindingsThe authors find that IPO filing prices are positively related to measures of quality, except venture backing, which impacts prices non-linearly. Ceteris paribus, small (large) venture backed firms’ filing prices are set significantly lower (higher).Research limitations/implicationsFirm managers set IPO filing prices high when they believe the firm is likely to attract institutional investors due to its size, quality and certification, and will set prices low otherwise.Practical implicationsIndividual investors should be wary of IPO firms with lower prices. Managers should be cognizant of the positive relationship between IPO quality and price.Originality/valueThis study provides evidence that IPO prices reflect firm quality and may be set deliberately to attract individual investors when institutional investor demand is expected to be low. It also provides evidence that venture backing affects IPO prices non-linearly, consistent with the grandstanding hypothesis.

Relationship of IPO Issue Price and Listing Day Returns with IPO Pricing Parameters

Relationship of IPO Issue Price and Listing Day Returns with IPO Pricing Parameters

The role of admission documents on the pricing of UK fixed priced IPOs

Using text analysis, we investigate the impact of the length of prospectuses on IPO pricing for a sample of UK Fixed Priced IPOs between 2004 and 2012 and show more information in the prospectus improves price accuracy as longer admission documents exhibit higher offer price and less underpricing. We explain the effect on the offer price as the consequence of the “pilot fishing” stage which seems to characterize a lot of UK IPOs.

The anchoring effect of underwriters' proposed price ranges on institutional investors' bid prices in IPO auctions: Evidence from China

We examine the anchoring effect of underwriters' proposed price ranges on institutional investors' bid prices during IPO auctions. We find that the distribution of investor bid prices exhibits sharp spikes around both endpoints (the reference points) of underwriters' proposed price ranges and that investor bid prices increase with the disparity between the reference points and the expected IPO offer price. Our findings are robust to a battery of checks. In addition, the final IPO offer price is positively and the aftermarket performance is negatively associated with the disparity, respectively. Our findings suggest that institutional investors anchor on underwriters' proposed price ranges when bidding in IPO auctions and this anchoring effect has wealth effect on IPO pricing.

Unionization and IPO Underpricing

This paper investigates the impact of labor unionization on IPO underpricing. We demonstrate that the existence of unions reduces underpricing by 11.20%. Unionized IPOs are associated with downward offer-price revisions, higher cost of capital, inferior firm-operating performance, and incremental failure risk. We argue that union presence discourages investor participation, since investors discount the value of unionized IPOs. We conclude that labor unionization is an important factor in IPO pricing and first-day returns. Our findings are of particular interest to managers, labor unionists, and market participants.

Terminal values for firms with growth opportunities: explaining valuation and IPO price behavior

PurposeThe purpose of this paper is to use fundamental models incorporating structural relationships within the firm in a terminal value model for the second stage of a two-stage valuation model utilized to estimate the value of a company.Design/methodology/approachThe innovation is that growth options are identified within the structural relationships and a model capturing the value of the optionality is incorporated in the second stage of the two-stage valuation model.FindingsSignificant outcomes are that terminal value is shown to be a large portion of a company’s total value and the price behavior for initial public offerings produced by the model is consistent with the result of empirical studies.Originality/valueThis paper explicitly incorporates growth options in the second stage of a two-stage valuation model for the firm.

Uncertainty of political subsidy, heterogeneous beliefs, and IPO anomalies

This paper focuses on financial subsidies introduced by the Chinese government to benefit IPO firms. Because of high uncertainty, subsidy information deepens the divergence of opinions regarding IPO firm value among investors, and the IPO issuers accordingly raise their offer prices. This paper finds that the divergence of analyst forecasts is greater and the offer prices are higher when issuers have received higher subsidies before listing. Moreover, the decrease in investors’ disagreement and market performance after listing is also serious. Compared to state-owned issuers, the influence of subsidy information on heterogeneous beliefs, offer prices, and long-run performance of non-state-owned issuers is higher. Overall, this paper extends the research regarding the pricing of political information by following heterogeneous beliefs theory. Moreover, this paper develops a new IPO pricing framework under heterogeneous beliefs.

The Persistence of IPO Mispricing and The Predictive Power of Flipping

Despite underwriters' efforts to balance supply and demand in the IPO price setting mechanism, we show that the market accurately predicts (in the first-day return and volume) the direction but not the full magnitude of underwriters' pricing errors. That is, first-day winners continue to be winners on average (outperforming a size-adjusted benchmark) over the first year, and first-day dogs continue to be relative dogs. A trading rule of buy first-day solid beginning at the close of the IPO's second trading day outperforms the portfolio of first-day losers by about 14% in the next year during the 1988-1995 time period. An exception to this rule is the performance of extra- hot IPOs (with a first-day return greater than 50 to 60%) which are poor one-year performers on average. We also find that a measure of flipping, the dollar volume of sell-motivated block trades as a percent of total dollar volume on the first-day, has significant power to predict future returns, lending credence to investors' of cold IPOs as a rational strategy. Furthermore, we show that first-day flipping can be predicted from ex ante factors. Thus, we conclude that underwriters' pricing errors at both extremes (initial cold and very hot IPOs) are intentional and strategic.

IPO Mispricing. Evidence from Aftermarket Performance Tests and a Natural Experiment in Poland.

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.

The Dark Side of IPOs: Examining Where and Who Trades in the IPO Secondary Market

We study the levels of lit and dark fragmentation in IPOs. Using a sample of 451 IPOs, we find that measures of dark and lit fragmentation are higher in underpriced issues. We further test the claim that IPO price uncertainty is not fully resolved at the offering and that this ex-post uncertainty is related to aftermarket fragmentation. Our analysis shows that fragmentation, both lit and dark, contribute to this ex-post uncertainty, resulting in greater underpricing. We also document that measures of hidden, algorithmic, and retail trading are higher among underpriced issues. Further, our results indicate that algorithmic trading is relatively low around the offering, increasing in the later periods of IPO trading. Finally, we show that measures of dark and hidden trading exhibit inverse patterns around the offering, confirming that the two forms of dark trading are substitutes rather than complements.

Can Relationship Banking Reduce Firm's IPO Underpricing?

IPO underpricing harms pre-existing shareholders and reduces the capital firms can raise to fund their growth. This paper shows that relationship banking can reduce IPO underpricing by decreasing information uncertainty. I develop a theoretical model showing that good firms – those with a lower dispersion of market value – are harmed and bad firms benefit from IPO price uncertainty when there is no borrowing and, thus, no distinguishing information on firm quality. When investors receive signals about firm value only from publicly observable transaction lending, good firms benefit while bad firms suffer. However, when firms have access to loans through relationship banks and when such lending decisions are kept confidential, firms experience reduced IPO price uncertainty, which benefits both good and bad firms. I confirm this result empirically through difference-in-differences and reduced form instrumental variable regression designs. I use variation in the strength of the lending relationship between IPO firms and their underwriters generated by the repeal of the Glass-Steagall Act in 1999, which allowed commercial banks with close ties to their client firms to underwrite those firms’ equity issuances.

The Role of Political Connections in IPO Pricing

We frame IPO pricing as an efficiency problem for prospective issuers and explore the effect of connections formed via lobbying and PAC (Political Action Committee) contributions as proxies for corporate political connections. Rather than imposing a regression-based framework, we allow relationships to manifest themselves in a data-driven manner. Our analysis reveals nonlinearities between IPO pricing efficiency and the two contribution avenues. We uncover relationships separately according to business sector and also whether or not firms are heavily regulated. We conclude that future work should be split by industry according to the degree of regulation.

The Pricing of IPO by Investment Banks and Venture Capital: A Theoretical Model

The venture capitalists provide supervision and certification service for shareholding enterprises, which reduce the information asymmetry and attract more high quality investment banks. Thus, the price is close to the market price when the enterprise enters the market and under-pricing is avoided thereby. Based on the supervision and certification hypothesis, this paper builds a pricing model of investment banks and venture capital to explain the pricing mechanism of investment bank, investment risk pricing mechanism and the causes of underpricing.

Investor sentiment and IPO pricing: Market: Evidence from India

The present paper aims at understanding the variability in IPO volume and initial return in Indian capital market. In order to see whether the IPOs were timed with the favourable market or not the market was divided into the hot and cold market, defined on the basis of the monthly IPO volume. Then the relationship between market type and total proceeds was established with the help of a multivariate regression model with the idea that any timing attempt should be reflected in the activity of issuance of equity. The result based on multivariate regression suggest that Market timers, identified as firms that go public when the market is hot, tried to maximize the total proceeds at the time of IPO. The hot-market effect is remarkably robust; it is significant for both firm and industry-level characteristics

IPO Pricing in Japan: The Effect of First Price Revision on Subsequent Price Formation

IPO Pricing in Japan: The Effect of First Price Revision on Subsequent Price Formation

Is There Information Production in Auctioned IPOs with Uniform Price?

Using a large proprietary IPO bidding dataset from China, we examine whether there is information production in auctioned IPOs in which uniform price applies and the underwriter has no allocation discretion. Our IPO-level and IPO-bidder-level analyses suggest that institutions bid in IPO auctions in a way broadly consistent with the information production hypothesis that posits bidders possess and reveal information in IPO pricing. The results are robust to controlling for a bidder’s observed prior underwriting relationship and unobserved time-invariant relationship with the underwriter. Our findings are germane to the IPO auctions pioneered by WR Hambrecht in the U.S.

IPO Underpricing and Oversubscription in China

We use simultaneous equations to model the bi-directional causality between IPO initial returns and oversubscription ratios in China. We find that the causality is one-directional from oversubscription ratios to IPO initial returns in the post-reform period (2005–2015), which is consistent with a demand effect. By contrast, a demand effect did not exist in the pre-reform period (1996–2004). Our findings suggest that the 2005 reform of the IPO pricing mechanism has allowed IPO prices to be determined by market forces in China.