IPO Returns Research Articles

The new issues puzzle revisited: The role of firm quality in explaining IPO returns

We study the risk and return characteristics of IPOs for up to 60 months. After controlling for Asness et al. (2014) quality minus junk factor, IPOs outperform the benchmark portfolios. The previously-documented negative abnormal IPO returns may derive from inaccurate benchmarks.

Effect of Ownership Retention on Initial Returns of IPOS Listed on NSE

Effect of Ownership Retention on Initial Returns of IPOS Listed on NSE

The Relation between Initial Returns and Audits by the Big Four Accounting Firms

This paper mainly explores the relation between initial returns and audits by the big four accounting firms (the Big Four) in China. The sample period is from January 2007 to December 2012 (the new accounting standards in China is implemented after January 2007 for integrating with the international standards), and selected 1,069 IPO firms listed in the Shanghai Stock Exchange and Shenzhen Stock Exchange in this paper.Many previous studies have proposed the Informational Hypothesis, which states that the initial returns of IPOs being audited by the Big Four are lower than those IPOs being audited by other accounting firms. Oppositely, this paper proposes the Snap-up Hypothesis due to consider the IPOs in mainland China are characterized by “three lows,”: the low reliability of audits being performed by non-Big Four, low proportion of IPOs audits being performed by the Big Four, and low balling ratio. These “three lows” features indicate that the Snap-up Hypothesis applies in the IPOs market of mainland China. In other words, the initial returns of the IPOs being audited by the Big Four are higher than those IPOs being audited by other accounting firms due to the Big Four have the superior reputations.This paper further collects the trading volumes and the turnover ratio on the first day, and selects the Big Four audited IPOs by snap-up tide. As above mentioned, because the snap-up tide and raised stock prices on the first-day listing, investors may purchase the shares when offering and sell them on the first-day listing to obtain considerable profits.

Reducing Uncertainty Through a Two-Stage IPO

We examine the effects on IPO uncertainty of an alternative going-public mechanism – the two-stage IPO, where a firm first gets quoted on the OTC market, and then upgrades to a national exchange where it first issues public equity. We find that a two-stage IPO firm experiences lower underpricing and return volatility than does a similar traditional IPO firm. We also find that uncertainty decreases significantly between the times of first OTC market quotation and upgrade. We show suggestive evidence that two-stage IPOs with greater disclosure during the first stage experience greater reduction in uncertainty. Our results are robust to controls for the potentially endogenous choice of a two-stage IPO.

Why do IPO issuers grant overallotment options to underwriters?

In contrast to prior studies suggesting that overallotment option (OAO) provisions reflect underwriters' exploitation of IPO firms, we provide evidence that issuers benefit in several ways. We estimate that OAO provisions lead to lower total issue cost, less negative post-IPO performance, lower post-IPO volatility, and larger IPOs. OAO provisions are more likely for large firms undertaking relatively large IPOs, especially where a large portion of the shares are offered by selling shareholders. Our evidence also indicates that managers and other insiders may benefit if their shareholdings would be locked up unless the OAO call option feature was exercised.

Leaving money on the table in venture-backed biotechnology IPOs

This study analyzes first-day returns (underpricing) for venture-backed biotechnology IPOs during 1980 through 2015. The result of this study shows that the average first-day return was 17.5 percent, which translates into an amount equal to $6.3 billion that was left on the table - nearly triple the $2.2 billion in underwriter fees. The study provides different theoretical explanations to the underpricing phenomenon and discusses why venture capitalists may be willing to accept leaving money on the table. The analysis also shows that IPOs with a large degree of underpricing are concentrated in hot IPO markets such as during 1999-2000 and more recently in the years 2014-2015. Notable, eight of the thirteen venture-backed biotechnology IPOs with the largest amount of money left on the table in the history of biotechnology went public during 2014-2015. From an investor perspective, if the degree of underpricing is an indicator of a pricing bubble, as was the case in 1999-2000, rational investors should at least be a little bit concerned about the state of the biotechnology equity market. From a management and venture capitalist perspective, issuing firms should at least consider using auctions as opposed to book-building to price and allocate IPOs to decrease the degree of underpricing and thereby the amount of money left on the table.

IPO Signaling Theory: A Revisit

The theoretical model in this study predicts signaling and non-signaling equilibriums can coexist within perfectly competitive stock markets, with signaling evident in larger IPO proceeds. Introduction of market incompleteness into the theoretical framework demonstrates signaling is evident in better post IPO price support, equivalently evident in less negative or more positive post IPO price drift. Within context of markets that are incomplete, separating signaling equilibriums are shown not to be amenable to assumptions of valuation uncertainty. Separating signaling equilibriums constitute, however, dominant equilibriums within context of presence of information asymmetry between issuers and investors. In presence of frictions within product markets, assumptions of information asymmetry within incomplete stock markets generate separating or mixed signaling equilibriums. A distinguishing feature of the signaling framework in relation to prior work is a departure from a priori categorization of IPO parameters as signals of quality. This abstraction nonetheless, the signaling framework endogenously generates distributions of IPO underpricing as sufficient statistics for identification of signaling equilibriums. The theoretical model predicts characterization of IPO underpricing as left on the table during IPOs is theoretically appropriate only within context of mixed signaling equilibriums. Given mixed signaling equilibriums imply presence of market frictions within product markets, IPO issuers act rationally whenever they leave money on the table during IPOs. Study predictions, obtained endogenously without recourse to underpricing as a signal of quality, constitute significant departures from and improvements on prior models of IPO signaling theory.

Green energy companies: Stock performance and IPO returns

This study aims at investigating the performance of energy companies at IPO and highlighting the differences in underpricing and stock return trends of green energy companies compared to non-green ones. We select all energy stock IPOs between 2000 and 2014 on the main European markets and evaluate first day and long run performance to shed light on the differences of the two groups of firms. As further refinement, we evaluate the determinants of short and long term performance. Evidence shows that green companies have a lower underpricing, which nevertheless disappears after few days of trading and when controlling for underpricing determinants. In the long run, performances of green and non-green are similar and empirical results show that the traditional risk factors explain return dynamics.To the best of our knowledge, this is the first paper to analyse the underpricing and stock performance of green energy companies.

IPO pricing: Do institutional and retail investor sentiments differ?

We study the impact of institutional and retail investor sentiments on first day and long-term IPO return using a sample of Chinese IPOs. The mandatory disclosure of institutional investor bidding information in the book-building process allows us to directly separate institutional investor sentiment from those of retail investors’. Our findings suggest: (1) both institutional and retail investor sentiments are positively correlated with the first day IPO return; and (2) only retail investor sentiment is negatively correlated with long-term IPO performance.

Going public abroad

We examine the decision of a firm to go public abroad and list securities outside their country of origin. Foreign IPO issuers are more likely to choose a global underwriter but only if the home country is less financially integrated. We find that the probability of conducting a foreign IPO is higher if the home country has a less developed stock market, its disclosure regime is weaker and is less financially integrated. Using a matched sample, we show that foreign IPOs raise more capital than their domestic counterparts. Finally, the determinants of the choice of a US listing are unique. Our results suggest that the rise of global underwriters facilitates the movement of capital across nations and contributes to world financial globalization.

Going Public Abroad

Abstract We examine the decision of a firm to go public abroad and list securities outside their country of origin. Foreign IPO issuers are more likely to choose a global underwriter but only if the home country is less financially integrated. We find that the probability of conducting a foreign IPO is higher if the home country has a less developed stock market, its disclosure regime is weaker and is less financially integrated. Using a matched sample, we show that foreign IPOs raise more capital than their domestic counterparts. Finally, the determinants of the choice of a US listing are unique. Our results suggest that the rise of global underwriters facilitates the movement of capital across nations and contributes to world financial globalization.

Twitter Sentiment and IPO Performance: A Cross-Sectional Examination

In this article, the authors examine the cross-sectional relationships between 325 IPOs’ first-day returns and their corresponding tweet sentiment, as defined by iSENTIUM LLC’s sentiment engine over the period from 2013 through 2014. They find that tweet sentiment is positively correlated to contemporaneous IPO returns. Interestingly enough, the authors document a positive relationship between prior days’ (1 day, 2 days, and 3 days) tweet sentiment and next-day IPO returns from offering price to opening price, along with a negative relationship between prior days’ (1 day, 2 days and 3 days) tweet sentiment and next-day IPO returns from opening price to closing price. Nevertheless, their examination of the relationship between intraday tweet sentiment and intraday IPO returns yields insignificant results. They find that tweet sentiment matters for IPO first-day performances, but the nature of this relationship appears very complex.

The role of internationalization on the IPO performance of service firms: Examination of initial returns, long-run returns, and survivability

This study examines the effect of internationalization on the initial and long-run IPO performance of service firms. The study discusses that pre-IPO internationalization of service firms contributes to the explanation of long-discussed IPO underpricing phenomenon, and underperformance of IPOs in the long-run. Sample of the study includes 1822 IPO issues conducted by US service firms between 1980 and 2009. Findings of the study suggest that international service firms leave less money on table in their IPOs compared to domestic service firms by providing significantly lower first day returns to their investors on their first day of public trading. Moreover, our findings provide evidence that 3-year cumulative abnormal returns and 3-year buy-and-hold returns of international service firms are significantly higher than domestic service firms, and international service firms outperform domestic service firms in both operating return on assets and operating cash flows in the post-IPO period. Lastly, the study documents that survival rate of service firms subsequent to an IPO issue increases with pre-IPO internationalization.

The Impact of IPO on the Secondary Stock Market—An Empirical Research

The IPO market can achieve financing function of the stock market after the IPO listed companies enter the securities market circulation. The IPO market and the secondary stock market complement each other and there is a strong relationship between them. In the study of the impact of the secondary stock market for the IPO market, based on supply and demand theory, the stock market expansion is a bad news which will lead to huge financing unilateral fall. This article mainly studies the impact of IPO on the secondary stock market. On the basis of theoretical analysis, we use linear regression model based on least-square method to explore the relationship between them, and confirm that the IPO issues have negative impact on the stock market retunes. When the external factors in the model and controlling factor within the model maintain equilibrium, the changes of the stock market rate of return caused by IPO financing are very significant. Stock market returns of IPO financing have considerable flexibility. At the end of the paper, some suggestions are put forward to strengthen the construction of the issuer integrity, the exit mechanism of listed companies and strengthen the supervision of matter and afterwards.

Intended use of IPO proceeds and firm performance: A quantile regression approach

This paper investigates the link between intended use of proceeds and the decline in post-issue operating performance of IPO firms. It distinguishes between capital and strategic motives and employs quantile regressions to examine the Indonesian equity market over the period of 2000–2010. The overall evidence shows that post-issue performance can be explained by firm motivation to IPO issue with the capital motive being the critical driver of good performance in Indonesia. Investment in fixed assets and in stock market shares lead to better performance while other usages lead to poor performance. The results are robust to accounting for ownership structure and to alternative classifications of IPO intent. These results have policy implications for the management of IPO proceeds.

Conflicts of Interest in the Underwriting of IPOs and Price Stabilization

Banks that supply capital and simultaneously underwrite securities for the same clients may benefit themselves or their clients at the expenses of investors by overpricing securities. We investigate this issue by analyzing price stabilization and short-term returns of IPOs. Our analysis suggests that equity-conflicted underwriters overprice IPOs and use price stabilization to disguise overpricing. The same does not happen with loan-conflicted underwriters. We also show that the partial adjustment phenomenon may result from price stabilization, since it disappears after the stabilization is over. JEL codes: G24

Initial and Long-Run IPO Returns in Central and Eastern Europe

ABSTRACTThis article provides original evidence on IPO underpricing and long-run underperformance in Central and Eastern Europe (CEE) and compares results to the European Union’s developed capital markets from 2000 to 2009. Using both index-adjusted and CAPM-adjusted returns, we find significant underpricing that is significantly higher than underpricing of comparable IPOs in the European Union’s developed capital markets. We show that the CEE’s initial IPO returns also exhibit significantly higher volatility. In line with the asymmetric information theory, we indicate that smaller IPOs in the CEE region have greater underpricing than the larger IPOs. Contrary to the literature, we unambiguously confirm long-run underperformance toward the benchmarks. In some model specifications, we also find that IPO long-run underperformance in the CEE region is less present than in the European Union’s developed capital markets.

DOES IPO GRADING ADD VALUE TO RETAIL INVESTORS?

ABSTRACT In May 2007 SEBI made IPO grading mandatory in order to increase the investor protection from low-grade investment securities. Grading was expected to provide investors with the additional supplementary information to assess their investment in IPO, specifically the retail investors because owing to the small scale of investment and information acquisition being a costly affair, this set of investors rely on market information such as the assessment of independent credit rating agencies. In the light of debates on the efficacy of IPO grading across credit rating agencies, regulator implemented the recommendations from Primary Market Advisory Committee (PMAC) and made IPO grading optional from 2014. The study analyses the impact of IPO grades on the annualized returns of IPO issues from 2010 to 2013. The analysis is aimed at providing a viewpoint to the debate on the usefulness of the grading mechanism to the investors or the firms. Keywords Certification Hypothesis, Reputational Signalling, IPO Grading, IPO Returns

Firm Age and Valuation: Evidence From Korea

AbstractUsing Korean stock market data, we document evidence that firm age is a key determinant of firm value. Specifically, firm value (measured by the market‐to‐book equity ratio) has a downward sloping relation with firm age. We also find that profitability and capital expenditures decline as firms age, suggesting that firms may become less valuable with age as they become less profitable and run out of investment opportunities. Our evidence also suggests that firms conduct IPOs by capitalizing on a small window of opportunity for listing during which their profitability is temporarily at its peak. Because this profitability is not sustainable, IPO issuers experience a sharp drop in profitability, contributing to a negative relation between firm value and age in the post‐IPO period. The learning hypothesis of Pástor and Veronesi () is unable to explain the negative firm age–value relation in the Korean stock market, given that uncertainty does not decline with age and that the negative relation is either non‐existent or very weak among dividend‐non‐payers.

Initial Performance of IPOs and the Bankruptcy Risk: A Comparison of Internet Firms and the Traditional Firms

<p>This study examines whether Internet Firms’ IPOs have more of a tendency to fail than Traditional Firms’ IPOs. IPO issue has long been known as an interesting yet complicated topic to explore. There are heated debates on whether Internet Firm IPOs outperform or underperform Traditional Firm IPOs. In other words, whether investment risks associated with Internet Firms are different than Traditional Firms? Should investment decision-making process be different for Internet Firms than Traditional Firms? In this study, Internet Firms are defined as companies that are providing goods and services through Internet. Furthermore, all other types of companies are considered as Traditional Firms. The Z-score formula for predicting bankruptcy of Altman (1968) was utilized. Then the two-way factorial ANOVA was conducted with the type I error as 0.05 to test the Z-Score across 12 quarters from January 2012 to December 2014. The findings revealed that both Internet Firms and Traditional Firms generally had similar risks as no one type of firms showed significantly higher risks than the other.</p>