Initial Public Offerings Market Research Articles

The Role of Cornerstone and Strategic Investors in IPO Survival

We examine the impact of the allocation of initial public offerings (IPOs) to specific investor groups on post-IPO performance in terms of how long an IPO remains listed. We focus on the Hong Kong IPO market, where detailed data on share allocation are publicly available. In this context, we assess the roles of so-called cornerstone and strategic investors in IPOs, who agree with the issuers a specified investment in the IPO and enter into lock-up periods. We find that the presence, number and lock-up periods of strategic investors, and the prevalence of foreign strategic investors, significantly increase IPO survival (delay the time to delisting). By contrast, the impact of cornerstone investors is at best marginally significant. Our results are robust to using different measures of survival.

Short Selling Before Initial Public Offerings

This paper shows that the presence of security lending supply before an initial public offering (IPO) reduces the initial stock return following IPO and improves subsequent long-run performance. We use a sample of British firms that go public via a two-stage IPO procedure where a firm becomes publicly traded on the London Stock Exchange in the first stage, and offers new shares to the public in the second stage. Stocks are lendable before the new equity issuance which relaxes the short-sale constraints that investors typically face in a conventional IPO. We find that two-stage offerings with higher security lending supply before offering are associated with lower IPO underpricing and better long-run performance. Our results are consistent with the conjecture that short selling improves the pricing efficiency of the IPO market.

Firm-specific risk and IPO market cycles

This article characterizes the role of risk in the initial public offering (IPO) cycle. While most of the previous literature uses the volatility of IPO initial returns to measure risk, we focus on different risk measures, namely firm-level systematic and idiosyncratic volatilities and the market-wide implied volatility index (VIX), to assess their role in the IPO cycle. Our results shed new light on (1) which risk measure is important in the determination of IPO cycles, (2) the temporal pattern of each risk component across issuing firms and (3) the relationship between market-wide uncertainty and IPO risk. Our findings reveal a lead-lag relationship between IPO waves, VIX and the IPO systematic risk measure. We also highlight the fact that market-level uncertainty predicts IPO activity and the level of idiosyncratic risk of the next-period-issuing firms. Issuing firms’ systematic risk can only be predicted by the systematic risk of firms now proceeding to their offering. The main implication resulting from our study is that one can better anticipate ‘hot-issue’ markets, as well as the specific risk components of future new issues. This will help improve upon the regulatory environment, IPO investment decisions and IPO timing given market receptivity.

New Metrics for Corporate Governance: Shifting Strategies of 'Activist' Investors in an Aging IPO Market

This paper examines initial public offerings (IPOs) as funding rounds for high-tech companies and exit mechanisms for investors, as well as the stringent corporate governance requirements that apply to newly listed companies in the growth stages of their development. Current investment trends seem to indicate that the IPO market is aging: More and more high-tech companies decide to remain private longer. Moreover, public market investors, such as hedge funds and mutual funds, increasingly invest in non-listed high-tech companies, making “IPO-like” investment rounds at massive valuations a normal phenomenon in the private market. These developments have led to the belief that we are in the next tech bubble. Fortunately, however, a new establishment amongst investors is emerging. They realize that in order to prevent the bursting of the bubble, they must collaborate with management and actively contribute to a company’s medium-term and long-term performance.

Investors Rationality for IPOs Using Meta Analysis and Forest Plots in Neyeloff et al. (2012) Framework: An Investigation

This research article focuses on the contours of investors’ rationality as regard to the initial public offering (IPO). For last 20 years, financial world has been very volatile. Now the investors have actively started to participate in the investment activities. The investment markets are becoming more risky; time makes investors to behave differently. It is crucial to perceive the responses of the investors and to identify the factors of the investment decisions. This research article is to generalise research findings emanating from the research on the investors rationality conducted during 2001 to 2012. To achieve the objective of this study, the previous 20 research studies is taken as a sample; meta analyses is used as a statistical tool for analysing the data and to get results whether the investors are rational (or not) in making investment decisions in the IPOs market. And the result indicates that the meta analysis matches with the sample data and shows that the investors are rational for investing in the IPOs.

Two consecutive hot market periods: Is the IPO market in South Africa changing over time?

Various authors, such as Gao, Ritter and Zhu (2012), Weild (2011) and Fama and French (2004) reported increasing underpricing and a dramatic decline in both the profitability and the survival rates of Initial Public Offerings (IPOs) over the last few decades internationally. This study seeks to determine whether the IPO landscape in South Africa has shown similar trends focusing on two consecutive hot market periods (1997-99 and 2006-07). The findings are, contrary to expectations, that the level of underpricing has actually improved significantly over time with very little change in the size of the listings, the offer price or the years in existence prior to listing. There is, however, a significant change in the sectors these IPOs were listed in with relatively more listings in the Alternative Board (AltX), but less emphasis in the Consumer and Technology Sectors. Although not significant, it even seems as if the success and failure rate of IPOs in South Africa has improved marginally, providing some explanation for the improvement in the level of underpricing over time. A note of caution is also mentioned regarding the use of mean MAARs as a measure of underpricing, given the typically skewness of IPO data.

A Study on Impact of Grading on IPOs Performance in Shortterm and Long-term: With Reference to Indian Stock Market

We analyse 146 Indian IPOs (initial public offerings) that are introduced through a book building method from January 2007 to December 2008. We have considered all companies, which are available for trading in BSE (Bombay Stock Exchange) for three year. The evidence suggests that the Indian IPOs market is very slow after financial crisis period and more than 60% of the listed companies are trading below the listed prices. From the analysis of the data, it is identified than the Indian IPOs are underpriced in initial day of listing and underperforming in long-run. The average winning bidders earn a significant average abnormal return of 4.25% in the initial day of listing and loose more than 25% of their investment during the 3 year of share holding period. Finally, there is strong evidence that, the grading of an IPO has a significant impact on IPOs after market performance. The highest graded IPOs are underpriced in initial day of listing and highly over performed after 36 month of listing.

Endowment Effects in the Field: Evidence from India's IPO Lotteries

Winners of randomly assigned initial public offering (IPO) lottery shares are significantly more likely to hold these shares than lottery losers 1, 6, and even 24 months after the random allocation. This finding persists in samples of highly active investors, suggesting along with additional evidence that this “endowment effect” is not driven by inertia alone. The effect decreases as experience in the IPO market increases, but remains even for very experienced investors. These results provide field evidence derived from the behavior of 1.5 million Indian stock investors consistent with the laboratory literature that documents endowment effects for risky gambles.

Can Venture Capitalists Tame the Wolves? An Analysis of Fraudulent Underwriters, IPO Characteristics, and VC Certification

A recent hit movie, The Wolf of Wall Street, highlighted the fraudulent activity of the investment bank Stratton Oakmont. Unfortunately, this was not the only such financial firm convicted of illegal behavior during the 1990s; there were at least 34 Initial Public Offering (IPO) underwriters that were the subject of SEC enforcement during this period. I examine the characteristics of IPOs underwritten by these investment banks, particularly as they compare to other IPOs. I find that IPOs underwritten by sanctioned investment banks (particularly those that were less active in the IPO market) were significantly different with respect to both firm and offer characteristics, including having higher underpricing and worse long-term performance. Further, such IPOs, while less likely to be backed by a venture capitalist, were positively impacted by this third-party relationship, in that underpricing was lower and long-term return was higher; this is likely due, at least in part, to the certification role provided by venture capitalists.

Factors Influencing IPO Decisions. Do Corporate Managers Use Market and Corporate Timing? A Survey

Abstract This paper explores the motives for Initial Public Offerings (IPOs); that is, whether market mispricing or the behavioral inclinations of investors and analysts impact corporate decisions about rising equity, with a particular focus on market and corporate timing practices of managers going public. To do so, an anonymous survey was conducted of 166 managers of firms that recently went public at the Warsaw Stock Exchange in Poland (being the second most active IPO market in Europe, after London). The resulting data reveals that managers attempt to time bullish markets and good historical corporate financial results.

Performance of Initial Public Offerings: Evidence from Hong Kong

Abstract This paper presents the findings of a study on the performance of the initial public offerings (IPO) of shares listed on the Hong Kong Stock Exchange (HKEx), which has been the largest IPO market in the world since 2009. One indicator of the success of an IPO is its subscription rate, which can be used as a proxy for the level of investor confidence in the stock being offered. This paper examines the relationship between the performance of an IPO and its subscription rate, and the corporate factors that may affect an investor's decision to subscribe to an IPO. The Hong Kong evidence can help shed light on the importance of agency cost in the pricing of IPOs.

A Survey of Literature on IPO Market Puzzle: Determinants of Listing Day Returns in IPOs

Initial public offering (IPO) related activities created, one of the greatest puzzles in finance researchers and practitioners, and maximum no. of theories in this regard. In fact, puzzles are many, from underpricing by issuers to subscription of overpriced securities by investors, from issuer’s content with underpricing Underwriters to sentiment investors to shun rationality, from market efficiency to moral hazard and agency problem, from time varying pattern to cross country varying pattern, from assumption about rationality to sentiment investors, and so on, the puzzles goes up to varying assumptions from market participants to impact of regulations. Soon after, IPO pricing puzzle took center stage in finance literature debates, researchers proposed various theories and interpretation to explain the puzzle. Different researchers made different assumptions about market, about participants, about behavior, about risk, about definition of underpricing etc. while some theories were developed with induction approach; some were developed with deduction approach too. While some researchers were proposing their theoretical models, several other researchers were contributing with insights from their empirical studies. IPO puzzle witnessed maximum no. of theories and hypothesis to explain the puzzle, developed on different basis. Some theories were developed based on information asymmetry, some based on institutional framework and some were based on behavioral basis. However, several theories that were proposed as competing (as alternative), with a closer look, might look actually completing each other in explaining the wider phenomena of IPO puzzle, because of their varying assumptions that covers different aspect or states of market. This literature review has been done with objective to review theoretical literature developed to explain IPO puzzles in such comprehensive framework, to examine, if they together could be fitted into a unified picture of IPO theory. The objective is to contribute towards reductionism of the theories and to provide some ground for future research questions. The focus area is mainly theoretical review of literature; however, help of some empirical work that were observed during the work is taken with limited purpose to complete the analysis. In this process, some methodological issues with empirical analysis and suggestions are also discussed for use of future empirical work in this field to make result more unbiased and inclusive. A potential new model is suggested that can incorporate various complementing models into one to solve IPO market puzzles.

Foreign Institutional Investors and the Indian IPO Market— An Investigation from 2009 to 2011

The Indian capital market post liberalisation underwent various reforms and deregulations which heavily attracted foreign investments particularly the portfolio investments. The Indian primary market on the other hand is an integral part of the capital market which infuses fresh capital into the system by mechanisms like Initial Public Offering (IPO). This article thus attempts to make an understanding of few major causes like IPO size and market capitalisation as major forces in attracting foreign institutional investors (FII) inflows into the Indian primary market and thereby analysing the role of FIIs into capital formation.

A Review Of The Determinants Of Long Run Share Price And Operating Performance Of Initial Public Offerings On The Johannesburg Stock Exchange

This paper provides some new evidence on the determinants of long run operating and share price performance of Initial Public Offerings (IPO) on the Johannesburg Stock Exchange (JSE). It has been hypothesised that the information contained in the pre listing documents could shed some light on the aftermarket performance of South African IPO shares. In line with previous literature, South African IPO shares significantly underperformed the market on average. Additionally, there is a statistically significant negative relationship between IPO Volume and long run performance, suggesting that the South African IPO market may be subject to the fads and over optimism theory of Ritter (1991). The overoptimism hypothesis is further cemented by a negative correlation between pre IPO revenue forecast and aftermarket operating performance. Listing expenses play a moderate role in the reduction of the aftermarket performance of IPOs on the JSE. However, it appears that international investment banks have a positive influence on the aftermarket performance of IPOs on the JSE. Likewise, firms audited by the BIG 4 audit firms tend to perform well in terms of aftermarket buy and hold returns. Large firms at the time of listing tend to perform well and firms with high growth prospects at the time of listing generate a negative and significant return on their investment in total assets. Although the contingent liabilities disclosed in the prelisting reports negatively influence most of the measurers of aftermarket performance, the relationship is, by and large, insignificant.

Underpricing of IPOs in Saudi Arabia and Sharia compliance

Purpose– The purpose of this paper is to explore the extent of underpricing in the Saudi Arabian market of initial public offerings (IPOs), offer explanations and consider whether Sharia-compliance had a significant impact on the initial returns.Design/methodology/approach– A comprehensive sample of 72 IPOs in Saudi Arabia between 2004 and September 2010 is used to analyse the initial return after adjusting it to the market movement as well as controlling for some common factors.Findings– This paper finds that not only underpricing occurs but it is also among the highest levels in the world. While traditional factors affecting initial returns include age, market timing and firm size, it is found that Sharia compliance significantly reduces underpricing in Saudi Arabia. This may imply that Sharia compliance helps to reduce the uncertainty and consequences of the limited information inherent in IPOs.Research limitations/implications– Further research is needed to see if the effect of Sharia compliance status on the short-run performance of IPOs extends to other Islamic countries or is a country-specific characteristic. More firms need to be examined to identify the market characteristics that drive the returns.Practical implications– Very substantial sums are being “left on the table” and more efficient pricing of IPOs would be of considerable benefit to firms.Social implications– By considering two different regimes, this paper offers some important lessons for the treatment of risk-taking, particularly in Islamic countries.Originality/value– This paper is among the first to provide an empirical evidence of the impact of Sharia compliance on the initial return pattern in the IPO market.

The IPO underwriting market share in China: Do ownership and quality matter?

This paper investigates the determinants of initial public offering (IPO) underwriting market share in China. Using a sample of underwriters in China’s IPO market during 2004–2012, we find the following results. First, underwriting quality is overall positively related to underwriting market share. Second, individual underwriting quality measures are significantly related to market share as well: Affiliated star analysts are valued by both state-owned enterprise (SOE) and non-SOE (NSOE) issuers. The post-IPO performance of previous clients (industry specialization) is a significant determinant of market share in the SOE (NSOE) IPO market. Third, central government ownership of underwriters is a significant determinant of market share in the SOE market. Finally, a further test on regulatory change shows that underwriting quality is playing an increasingly important role in enhancing underwriting market share in China’s new issue reform era.

What Explains the Initial Return of Initial Public Offerings after the 1997 Asian Financial Crisis? Evidence from Thailand

Do financial development, domestic interest rates, and interest-rate differentials simultaneously affect the underpricing of initial public offerings (IPOs) in emerging market countries? Using a sample of 187 IPOs in Thailand between 2000 and 2012, I show that financial development, stock market conditions, bond market development, and interest-rate differentials affect the initial return, and that several of these effects appear to be contingent on (1) whether the IPOs are hot or cold and (2) whether the interest-rate differential is positive or not. During periods of positive interest-rate differentials, the effect of the interest-rate differential on the initial return is positive and economically significant. Overall, my findings suggest that investors might undertake carry-trade strategies in the IPO market. In addition, the initial return of the IPOs in my sample appears to be lower than the initial returns reported by previous studies using the pre-1997 financial crisis period sample.

International IPO Markets and a Foreign IPO Puzzle

We analyze a firm’s decision to conduct initial public offerings (IPOs) internationally. Global IPOs (issuing both domestically and abroad) raise significantly more capital in the international markets than any other form of IPO. Though over eight percent of firms conducting an IPO between 1995 and 2010 choose to conduct Foreign IPO (issuing only abroad), this form of IPO fails to raise significantly more proceeds than matching IPOs with similar firm characteristics. This constitutes a “Foreign IPO Puzzle.” We consider several explanations for this puzzle. Our results are consistent with firms attempting to take advantage of hotter IPO markets, more efficient pricing, better legal environment, better opportunities for a subsequent SEO, and stronger currencies. None of these hypotheses fully explains away this puzzle.

What explains the initial return of initial public offerings after the 1997 Asian financial crisis? Evidence from Thailand

Do financial development, domestic interest rates, and interest-rate differentials simultaneously affect the underpricing of initial public offerings (IPOs) in emerging market countries? Using a sample of 187 IPOs in Thailand between 2000 and 2012, I show that financial development, stock market conditions, bond market development, and interest-rate differentials affect the initial return, and that several of these effects appear to be contingent on (1) whether the IPOs are hot or cold and (2) whether the interest-rate differential is positive or not. During periods of positive interest-rate differentials, the effect of the interest-rate differential on the initial return is positive and economically significant. Overall, my findings suggest that investors might undertake carry-trade strategies in the IPO market. In addition, the initial return of the IPOs in my sample appears to be lower than the initial returns reported by previous studies using the pre-1997 financial crisis period sample.

Extreme IPO underpricing

Purpose – The purpose of this paper is to model the Chinese unique regulation changes with the supply-and-demand analytical framework and structure the relationship between initial public offerings (IPO) underpricing and institutional changes with the comparative static method. A well-functioning stock market is crucial to the transition into a market economy, but the Chinese stock market is somehow twisted with frequent government interventions, particularly the IPO market. Can the underpricing issue be mitigated in the changing institutional settings? Can the market-orientated incremental reform of regulations succeed in the Chinese stock market? Design/methodology/approach – The theoretical analysis confirms that IPO underpricing becomes relatively better with dynamic changes of relaxation of the approval and pricing systems. Collecting and examining the data of newly listed firms from 1993 to 2010, the influence of institutional changes on IPO underpricing with regressions, such as ordinary least square (OLS), bootstrap and two stage least square (2SLS) estimation methods was further empirically examined. Findings – The magnitude of the Chinese IPO underpricing during the past two decades is as high as 181.6 per cent on the average. The sizes of IPO underpricing significantly reduce with an increase in the issuing sizes and the ratios of price-earnings ratios. The dummy variables of government-approved regulations are negatively associated with IPO underpricing. The dummy variables of pricing regulations are positively related to IPO underpricing and the coefficients become smaller with newer regulations. Generally, the magnitude of the Chinese IPO underpricing decreases over time. Originality/value – This paper enriches the IPO literature by dynamically examining the effect of institutional changes on IPO underpricing in Chinese primary markets. We argue that institutional changes characterized by incremental marketization can help to alleviate extreme IPO underpricing and to promote financial development. The Chinese transition from the planning system to the market system in the IPO market will be a long and strenuous process, but it works.