Pricing Of Offerings Research Articles

The Partial Adjustment of IPO Prices: Information or Speculation?

This paper reexamines the partial adjustment of prices of Initial Public Offerings (IPOs) by using a hand-collected dataset of refiling IPOs (IPOs with new price ranges updated in amendments after the preliminary but before the final prospectuses). 185 out of randomly selected 422 IPOs (43.8%) from May 1996 to September 2002 are identified as refiling IPOs. The price revisions are defined piecewise for these refilling IPOs: refiling price revisions (the deviation between the midpoints of the refiling price range and the file price range) and sub-price revisions (the difference between the offer price and the midpoint of the refiling price range). A puzzling two-stage partial adjustment is found: Issuers tend to partially adjust the refiling price with respect to negative information incurred at refiling but partially adjust the offer price with respect to positive information obtained from refiling to offering. This result holds even after controlling for sample-selection bias. It is the first time that evidence is provided for the partial adjustment with respect to negative private information. It challenges the asymmetric information theory of IPO underpricing from a different perspective as the partial adjustment to public information documented in previous literature has already raised questions. Issuers' inconsistent attitudes toward positive and negative private information are somewhat consistent with recent research on withdrawn IPOs and the role of underwriters. The former states that underwriters partially incorporate negative information in early bookbuilding period to decrease the probability of withdrawn but partially adjust offer prices with respect to positive information in later bookbuilding period to induce truth telling of investors. The latter complements Purnanandam and Swaminathan (2002), where IPOs may be 'overvalued' but 'underpriced'. Underwriters of IPOs play a dual role of information acquisition and managing investors' expectation.

The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition

ABSTRACTWe examine syndicates for 1,638 IPOs from January 1997 through June 2002. We find strong evidence of information production by syndicate members. Offer prices are more likely to be revised in response to information when the syndicate has more underwriters and especially more co‐managers. More co‐managers also result in more analyst coverage and additional market makers following the IPO. Relationships between underwriters are critical in determining the composition of syndicates, perhaps because they mitigate free‐riding and moral hazard problems. While there appear to be benefits to larger syndicates, we discuss several factors that may limit syndicate size.

Offer pricing of Australian industrial initial public offers

In the present paper we examine the setting of offer prices for Australian industrial initial public offers (IPOs) by fixed price offers. Our investigation focuses on the associations between offer prices and both market prices and accounting based measures of intrinsic value. Fixed-price offers are less likely to be influenced by the canvassing of market demand when compared to the US setting, where book-builds are typically used. We conclude that while Australian industrial IPOs are underpriced, they are not systematically undervalued. Contrary to research undertaken by Purnanandam and Swaminathan in the US book-build setting, we do not conclude that Australian IPOs are systematically overvalued. As part of our analysis, we develop an empirical model of offer prices based on interviews with several leading Australian stockbrokers involved in setting them. Finally, using the ratio of offer price to intrinsic value measure, we find some evidence that undervaluation is positively related to underpricing.

Speculative excesses in inital pricing of IPOS in the secondary market

This paper examines the pricing of Initial Public Offerings (IPOs) in the secondary market on the first day of aftermarket trading. The focus of this study is on shifts in average returns over time, and does not necessarily address the cross‐sectional implications of a risk/return relation. The focus of the study is to examine the reasonableness of first day trading prices of IPOs. Initial returns of IPOs, issued during the period, January 1, 1999 to June 30, 2000, reached as much as 800 per cent, and the average initial return for the study sample was of 76 per cent. An important question is whether the high initial returns, observed during this time period, are appropriate for the level of risk associated with these new issues. Related to this question is the pricing of these securities by investment bankers (i.e. the offer price) and the pricing of the securities in aftermarket trading (i.e the secondary market). The results of this study indicate the presence of speculative excesses in the initial pricing of IPOs in aftermarket trading during 1999 and part of 2000. Further there is no indication that IPOs are excessively underpriced by investment bankers during the study period, January 1, 1997 through June 30, 2000. The results of this study may be useful to investors in making decisions about purchasing new public securities in the secondary market.

Auditor Choice and the Pricing of Initial Public Debt Issues

We examine the importance of auditor choice to the pricing of debt initial public offerings. These securities raise information asymmetry by expanding firms' debt ownership structures to include public bondholders and by extending debt maturity. Prior research on initial equity issues has had difficulty discriminating between two motives for choosing a Big Five auditor: reducing the uncertainty about firms' financial statements and providing greater implicit insurance coverage in the event of audit failure. Results from separately estimating the impact of auditor choice on the perceptions of credit rating agencies and bondholders suggest that initial bond pricing is driven by both information and insurance incentives, with each responsible for lowering at-issue yield spreads by about 19 basis points, on average. We also report evidence consistent with the prediction that firms intending to replace bank debt with public debt, which reduces cross-monitoring among lenders and increases default risk according to extant research, benefit more from hiring a Big Five auditor.

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.

Underpricing and aftermarket performance of American depositary receipts (ADR) IPOs

American depositary receipts (ADRs) are negotiable instruments representing foreign company shares traded in US dollars in the US capital market. We present comparative analyses of the pricing and aftermarket performance of Initial Public Offerings (IPOs) by ADRs and a matching sample of US firms over the 1990–2001 period. Offered by large, well-known multinationals, ADR IPOs go through a detailed scrutiny, and incur significant costs, during the pre-IPO period to recast financial statements in conformity with SEC rules and the US GAAP. This mitigates the information asymmetry between the IPO firm and investors. We categorize the ADR issuing country as developed or emerging, and our sample includes several cases of privatization of state owned corporations. The analyses indicate that (1) ADR IPOs are significantly less underpriced than comparable US IPOs; (2) IPOs from developed countries are more underpriced; and (3) Privatization IPOs are less underpriced than non-privatizations. The lower underpricing of ADR IPOs persists even after differential IPO attributes, the traditional proxies for information asymmetry and, the unique characteristics associated with ADR IPOs, are accounted for. We conclude that extant literature offers only partial explanation for this puzzling phenomenon.

Discounting and Clustering in Seasoned Equity Offering Prices

AbstractAn analysis of 4,814 SEOs during 1986–1999 indicates that the average offering ofnew shares is priced at a discount of 3% from the closing price on the day before the issue. Discounts have risen steadily over time, sharply increasing the indirect costs of issuing seasoned equity. There is evidence of increased clustering of offer prices at integers, and of greater importance in the analyst coverage provided by underwriters. Adjusting for other factors, we find that issues with integer offer prices, and underwriters with highly regarded analysts, are increasingly associated with larger discounts. The rise in discounts is consistent with an increased ability of investment bankers to extract rents from issuing firms.

IPO underpricing in China’s new stock markets

China’s recent economic reforms have included the privatization and listing of many state-owned enterprizes (SOEs). This study investigates the pricing of initial public offerings of A-shares sold to domestic investors and B-shares sold to foreign investors. Our data consist of 701 A-share IPOs and 117 B-share IPOs that listed in the period 1992–1997. The median initial return on A-share IPOs is 145% while the median underpricing of B-shares is just 10%. We find that risk is strongly and positively associated with the underpricing of A-shares. High government and legal entity shareholdings are also associated with underpricing. B-share underpricing is positively related to seasoned equity offerings (SEOs) and government ownership. We find that underpricing is a positive function of the relative price-to-book ratio and the relative price-earnings multiple. Our study gives some insights into the pricing of new issues on China’s stock exchanges.

Determinants of spreads on new high yield bonds of shipping companies

Abstract This paper investigates determinants of pricing of new high yield bond offerings of shipping companies. New high yield bond offerings issued by shipping companies in the US market, during the period 1993–1998, are used in the investigation. The empirical results suggest that credit rating is the major determinant of the price spread of the bond offerings. Financial leverage and shipping market conditions also account for a significant part of the price variability.

Offering Prospectuses,Competitive Strategies, and the Pricing of Initial Public Offerings

We explore the relationship between the strategic information in an IPO prospectus and the firm9s post-IPO pricing. Based upon a content analysis of 39 business to consumer (B2C) and 25 business to business (B2B) “dot.com” initial public offerings, several conclusions were reached. First, e-commerce firms showed dramatic short‐term underpricing and long-term underperformance. Second, we found strong support that the strategic information contained in the firm9s prospectus affects post-IPO pricing, and is incorporated in both the initial day and long-term market-adjusted stock prices. And third, we found that the reputation of the firm9s underwriter had little correlation with a firm9s post-IPO pricing success.

Underwriter Certification and Japanese Seasoned Equity Issues

In sharp contrast to results in the United States, the average stock price response to an announcement of a seasoned equity issue in Japan is positive. Offer prices in Japan, unlike the United States, are announced several days before the beginning of the subscription period and incorporate a substantial discount. We suggest that the positive announcement effects in Japan are consistent with the underwriter's certification of the issuing firm's value. We characterize the underwriter's risk as a put option and find a positive association between the underwriter's risk and the announcement returns, as well as other results consistent with underwriter certification. Copyright 2003, Oxford University Press.

The Initial Performance of IPOs: Evidence from Athens Stock Exchange

The pricing of Initial Public Offerings (IPOs) in the short-run has been analysed by several theoretical and empirical studies referring to the major international stock markets and seems to be a common characteristic in most international markets. Last decade this topic has been popular in Europe due to the increasing number of firms going public. This paper empirically analyses the initial performance of the Greek Initial Public Offerings (IPOs) to provide a market case of international evidence on performances of IPOs. The sample consists of 225 firms listed on the Athens Stock Exchange for the period January 1990 until December of 2001. This represents 79 percent of the IPOs listed during this period. The remaining 21 percent (59 IPOs from 284 in total) was not studied due to shortage of data. Our study shows that Greek IPOs are on average underpriced by 63.92% with 30 IPOs (13.3%) to be overpriced. The initial undepricing is 67.14% for industrial firms, 54.55% for finance firms and 56.19% for other firms. In terms of sub-sectors the highest return is obtained in Information Technology group while the lowest return is observed in Telecommunication Group. Results suggest that the IPO market on Greece is 'good' only for large offerings. Investigation of factors influencing the initial performance show that market condition, demand multiple, cold-hot issue periods, and offer price independence are significant determinants of underpricing.

The Role of IPO Underwriting Syndicates: Pricing, Information Production, and Underwriter Competition

We examine syndicates for 1,638 IPOs from January 1997 through June 2002. We find strong evidence of information production by syndicate members. Offer prices are more likely to be revised in response to information when the syndicate has more underwriters and especially more co-managers. More co-managers also results in more analyst coverage and additional market makers following the IPO. Relationships between underwriters are critical in determining the composition of syndicates, perhaps because they mitigate free-riding and moral hazard problems. While there appear to be benefits to larger syndicates, we discuss several factors that may limit syndicate size.

The Pricing of Initial Public Offerings when IPO Size and Investment Choice are Endogenous

This paper shows that the underpricing of a one-shot equity offering can be explained as a direct result of personal wealth maximization by the original shareholders. When a firm is taken public to raise capital for investment the original shareholders have to trade-off how much capital to raise and invest against how much fractional firm ownership to retain. Asymmetric information therefore creates a dilemma for the capital constrained owners of a firm with above-average investment opportunities. On one hand, their higher return on investment translates into a greater marginal gain from raising and investing more capital than for the owners of a lower quality firm. On the other hand, their firm's value is increasing more rapidly with investment than the value of a lower quality firm. This makes raising additional outside equity capital increasingly costly. The inherent relationship between the returns on investment and the firm values results in a violation of the single-crossing property. An investment policy exists that optimally trades-off an above-average firm's higher marginal costs of outside equity against its greater marginal losses from foregoing investment. At this investment policy issuing underpriced equity is shown to dominate all possible further changes in the investment policy. Several new empirical implications are derived.

Private Ownership Versus Institutional Ownership: exclusion pricing of initial public offerings

The authors examine the literature with respect to the pricing of initial public offerings and focus upon the relationship of pricing to the structure and conduct of the investment banking industry. Using a data base of all share offerings undertaken in the United States over a two and a half year period, the authors find that there is considerable evidence for the proposition that large, prestigious, and well capitalised investment banks tend to price their share offerings at a higher absolute level than those not meeting such characteristics. Using classical statistical methods, the authors find that the pricing strategy of investment banks is connected to their affiliation with investment funds and unit trusts. The motives for such pricing strategies, the authors argue, lie with the affiliation of investment banks with investment funds, suggesting that the pricing of new share offerings may be a means of excluding retail investors from participating in the strong returns such issues exhibit. The authors raise legal and regulatory implications of their findings in the context of the general consolidation observed within the investment banking industry.

The pricing of global and domestic initial public offerings by US companies

This study examines the pricing of global initial public offerings made by US companies as compared to purely domestic offerings. We find that global participation can significantly reduce underpricing by about four percentage points. Moreover, the degree of underpricing declines as larger proportions of shares are allocated to foreign investors. Our results suggest that US companies time their global offerings when foreign demand for US shares is high. There is also evidence that global offerings alleviate the downward pricing pressure associated with new share offerings.

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.

IPO performance in business to business “B2B” e‐commerce firms: effects of strategy and industry

Outlines previous research on the pricing of initial public offerings (IPOs), the particular characteristics of e‐commerce firms and the ways in which internet operations differ from traditional business contexts. Uses data from a sample of 28 US business‐to‐business, internet‐based e‐commerce firms to explore the links between industry‐specific and firm‐specific variables, IPO price and subsequent share price performance. Shows generally very high initial returns (115.2 per cent for the run‐up on the first day’s trading!) but negative long‐term returns; and the pricing is significantly positively affected by firm size, commercial strategies and management experience. Finds firms with the highest first day run‐ups were not necessarily the ones with long term underperformance and concludes that investors do actually use information on firm strategy.

Fundamental Valuation of Zero-Dividend Firms

The calculation of the fundamental price of a zero-dividend firm is accomplished here exploiting the Miller and Modigliani [1961] dividend irrelevance result, the earnings stream of the firm, and an extension of the Donaldson and Kamstra [1996] method of calculating a dividend-paying firm's fundamental price. This extension of Donaldson and Kamstra provides a new methodology for calculating fundamental asset prices when all earnings are retained. The pricing of initial public stock offerings is also accommodated. This method is illustrated by pricing Microsoft stock using only earnings and discount rates. The resulting fundamental forecasts of annual returns to holding Microsoft shares are highly correlated with market returns, with a regression of market returns on fundamental return (out-of-sample) forecasts yielding an r-squared of over 50%, greatly exceeding the performance of conventional valuation methods. This suggests that if an accurate forecast for earnings for the coming year were available, the fundamental model developed here holds the promise of reliable forecasting of price changes, even with the use of a very limited information set.