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This paper aims to examine performance of firms with a negative second-day return after the Initial Public Offering (IPO) relative to stocks with a positive second-day return after the IPO. Loughran and Ritter (1995) document that firms which have done an IPO or an SEO underperform similar firms over three- and five-year investment horizons. Loughran and Ritter (2002) also document that firms that go public “leave money on the table”, with this amount being almost twice as large as the fees paid to the investment banks.

The study’s null hypothesis is that stocks with a negative return on the second day of the IPO perform better than firms with a positive return on the second day of the IPO. The authors estimate the second-day return based on first- and second-day closing prices from the Center for Research in Security Prices, and they use a regression model and Jensen’s alpha to test the hypothesis.

The authors find evidence that rejects the paper’s working null hypothesis of superior performance of negative second-day return IPO firms relative to positive second-day return IPO firms in the three-year and five-year period samples. They fail to find statistically significant evidence in the entire period samples which suggest that negative second-day return IPO firms perform similarly to positive second-day return IPO firms.

The findings in this study raise interesting questions with regards to the ideas developed by Loughran and Ritter (2002) and the “money left on the table”. These findings are of interest to both entrepreneurs and investment bankers who advise them during the underwriting process. If there is not a benefit in terms of IPO performance to investors, then the question becomes – shouldn’t owners possibly consider actually “taking money from the table”. After all, the return to investors will be the same either way but if entrepreneurs make more money at IPO they would be motivated to start more companies in the future.

Groupon, an online coupon company, was one of many companies that considered an initial public offering (IPO) during what might be a second technology/internet/social media IPO boom in 2011. Some companies chose to postpone their IPOs, while others took advantage of the media attention focussed on technology companies, and in particular, social media firms. Should investors hop on the tech IPO bandwagon, or hold off to better evaluate the long-term prospects of tech companies, and in particular social media companies? Would the valuation of Groupon justify an investment in IPO shares?

The case was researched from secondary sources, using Groupon's IPO filing information, news articles about the IPO and industry research sources, such as IBIS World.

This case is appropriate for an advanced undergraduate or MBA corporate finance or investment elective. Most introductory finance classes do not have the time to cover later chapters in a finance textbook, where information about IPOs is generally found. It could also be used at the end of a core finance course, where the instructor wanted to introduce this topic through a case study of a hard-to-value internet-based company to illustrate the difficulties in setting IPO prices. The case could also be used in an equity analysis class, an entrepreneurial finance class or an investment class, to spur discussion about valuing an internet company and choosing appropriate investments for pension fund investing. This case could also be used in a strategy class, focussing on the five forces question, and eliminating the valuation question.

There is a great deal of literature about IPOs and their long-term performance. An excellent source is Jay R. Ritter's research, http://bear.warrington.ufl.edu/ritter, which has a longer time period and more data than could be contained in this case. IPO puzzles include persistent undervaluing of IPOs; in other words, the offer price is lower than, and sometimes substantially lower than, the first day close price. A second issue is the generally poorer long-run performance of companies after their IPO when compared to similar firms that did not do an IPO.

It has often been alleged that the financial markets, with all their speculative excesses, wastefully absorb resources that could be better employed in the real economy. Fritz Machlup, originally a student of Ludwig von Mises, dealt with that charge in the aftermath of the 1929 crash. His defense of the stock market remains germane to our time. In it, he argues that the stock exchange offers an important alternative mechanism of allocating savings to investment, while generally being a way station through which money travels on its way to the real economy either to finance capital projects or to be spent on consumer goods. To the extent the stock market ever absorbs capital, it is only during stock market booms. Yet these are generated by the uncertain course of central bank monetary expansion. Bull and bear markets cycles are, at bottom, politically driven events.

This paper aims to study how primary and secondary market investors react to intangibles information disclosed in Italian IPOs. Previous literature on intangibles information disclosure as a determinant of IPO underpricing has reported inconsistent results; moreover, an area that has remained unexplored is to what extent different categories of market investors react to such information disclosure.

Based on a sample of firms listed on the Italian Stock Exchange, the authors use factor analysis to uncover the most relevant intangible assets disclosed in IPO prospectuses; this information is then included in a series of regressions which read into the reaction of primary and secondary market investors by means of price variations.

Primary market investors are found to be more sensitive to information regarding the company’s attitude towards its human capital and to that describing its innovation capacity in terms of IT and R&D investment. Secondary market investors are more sensitive to strategic alliances, research and development and future plans.

The findings can be generalized, but the empirical evidence would be more relevant if tested in different geographical contexts (i.e. Europe and/or the USA).

The empirical results could help firms be more selective in their disclosure, thus possibly soothing management’s concerns regarding an overly extensive, and therefore risky, dissemination of non-financial information and avoiding them to incur unnecessary costs.

Being aware of how the stock market reacts to the information disclosed is crucial in determining new regulations and accounting standards.

The authors introduce an unbiased categorization of intangibles variables that supplants the multiple classifications proposed in the literature, and the authors set apart the reaction of primary and secondary market IPO investors to the intangible information disclosure.

Behavioral finance literature has long claimed that internet stock message boards can move markets. In this chapter, the authors study more than 2,000 internet board messages posted across finance message boards in India (Chittorgarh, etc.) for 110 companies that went for initial public offering (IPO) in the last one year. This study has multi-fold objectives. First, the authors try to identify the factors which lead to a discussion on an IPO stock in the message board. Second, the authors identify the factors which differentiate a widely discussed stock from the less discussed one. Next, the authors apply advanced machine learning technique to identify the topics which are discussed in the message board through automatic topic modeling. The methodology used includes a logistic regression model for identifying firm characteristics which leads to a probability of getting stakeholders’ attention and hence more discussion. The authors also use advanced topic modeling techniques to identify topics of discussion on the message boards through machine learning. The authors find that larger sized firms, younger firms, firms with low leverage, and non-manufacturing firms get discussed more and the topics of discussion relate to their financial statements, trading strategies, stock behavior, and performance.

The purpose of this paper is to study the reallocation of initial public offering (IPO) shares to retail investors, non-institutional buyers (NIBs) and qualified institutional buyers (QIBs). The authors examine how the reallocation process is related to the pricing decision of the underwriter. The authors also examine the long-run performance of the IPOs classified on the basis of the highest reallocation by retail investors, NIBs and QIBs.

The authors use regression analysis as well as 2SLS and three-stage least squares models to test the hypotheses. For long-run performance analysis, the authors adopt Carhart’s (1997) four-factor model.

First, the authors provide evidence that the reallocation of IPO shares for retail investors, NIBs and QIBs is frequent. Second, all three categories of investors are treated differently in the reallocation of underpriced shares. Third, the authors find that the reallocation and pricing strategies are interdependent and both the strategies are used by the underwriter to reward and favor retail investors for showing high level of demand. The authors find that in India, underwriters reward retail investors. Lastly, even though underwriters favor retail investors for reallocation, the authors find that IPOs which receive highest reallocation to retail investors perform poorly in the long run.

This paper is the first paper to show evidence of reallocation of IPO shares by underwriters for an emerging market. The paper is different from other papers as the regulatory regime present in the Indian markets is different from other markets.

India is one of the largest IPO markets in the world. However, IPO research in the developing world is limited. The purpose of this paper is to test the performance of Indian IPOs based on sponsored vs non-sponsored issues. The authors classify the IPO sample into venture capital (VC) and private equity (PE) sponsored issues and non-sponsored ones and include key operating characteristics as performance predictors.

The dependent variable is the buy-and-hold abnormal returns. The study uses key operating characteristics such as market capitalization, net sales, earnings before interest, taxes, depreciation and amortization, depreciation and amortization, price-to-book, asset turnover and leverage. A cross-sectional analysis is applied to test the long-run performance.

Sponsored IPO issues convey favourable information to investors about future earnings and prospects of the firm. The findings indicate that sponsored issues and, in particular PE sponsored issues are perceived by investors as having a positive impact on the operational performance of firms that the PE firms are involved in relative to the constituents of the index and this superior operational performance over time also leads to relatively better performing share prices. There are significant differences in terms of market size, industry classification and key operating characteristics across the three groups of issues.

This study has had to deal with much smaller samples of PE and VC when compared to similar studies conducted in the developed markets such as the UK and the USA. Further robustness tests on the market performance using factor models posed a problem due to limitation of the availability of these factors.

For the capital markets investors and policy makers, this research demonstrates the increasingly important role that PE and VC funds play in the investment landscape in India. It exhibits the increasing investor confidence in the Indian capital markets.

Using a sample of Indian IPOs comprising VC sponsored and PE sponsored issues, this study analyses the performance of Indian IPOs in an emerging market setting. This study, thus, contributes to the limited IPO research undertaken in developing markets.

The purpose of this paper is to examine whether the online auction mechanism in the USA is more effective at pricing initial public offerings (IPOs) than the traditional book building process.

The analysis compares the performance of online auction IPOs with traditional IPOs issued in the same industry area and in the same year to assess the differences in first day mispricing and its persistence. The paper compares the characteristics of firms choosing the auction process relative to the traditional process. It also uses regression models to examine whether online auction IPOs had a significantly lower first day price increase than traditional IPOs.

The results indicate that for 60 percent of the auction IPOs, over 40 percent of the traditional IPOs issued in that year and in that three‐digit Standard Industry Classification (SIC) area had greater mispricing. The mispricing of online auction IPOs relative to traditional IPOs persist over time for 50‐80 percent of online auction IPOs. Regression analyses controlling for industry effects, year effects, size of the issue, and type of traditional underwriter (low, medium, and high volume underwriters) suggest that the auction's first day price surges are not significantly lower than those of traditional underwriters. Moreover, high volume traditional underwriters have statistically significantly higher first day price surges than low volume traditional underwriters, supporting the theory that they intentionally misprice to benefit their preferred clients. Firms choosing the auction process tend to be smaller in terms of the number of shares of their IPO and their annual sales than firms choosing the traditional IPO process. There is some overlap in industry sector and age, although this varies by year.

This paper suggests that the auction process may not be as efficient in pricing IPOs as was initially intended and that there are opportunities for further innovation and improvement.

The goal of the study is to examine the effects of news sentiment and topics dominating in the news field prior to the initial public offering (IPO) on the IPO underpricing.

The authors’ approach has several steps. The first is textual analysis. To detect the dominating topics in the news, the authors use Latent Dirichlet allocation. The authors use bidirectional encoder representations from transformers (BERT) pretrained on financial news corpus to evaluate the tonality of articles. The second is evaluation of feature importance. To this end, a linear regression with robust estimators and Classification and Regression Tree and Random Forest are used. The third is data. The text data consists of 345,731 news articles from Thomson Reuters related to the USA in the date range from 1 January 2011 to 31 May 2018. The data contains all the possible topics from the website, excluding anything related to sports. The sample of 386 initial public offerings completed in the USA from 1 January 2011 to 31 May 2018 was collected from Bloomberg Database.

The authors found that sentiment of the media regarding the companies going public influences IPO underpricing. Some topics, namely, the climate change and environmental policies and the trade war between the US and China, have influence on IPO underpricing if they appear in the media prior to the IPO day.

The puzzle of IPO underpricing is studied from the point of Narrative Economics theory for the first time. While most of the works cover only some specific news segment, we use Thomson Reuters news aggregator, which uses such sources The New York Post, CNN, Fox, Atlantic, The Washington Post ? Buzzfeed. To evaluate the sentiment of the articles, a state-of-the-art approach BERT is used. The hypothesis that some common narratives or topics in the public discussion may impose influence on such example of biased behaviour like IPO underpricing has also found confirmation.

Small and medium enterprises (SMEs) play a crucial role in national economies worldwide, generating employment and contributing to innovation. This study tries to investigate the performance of the newly started IPO platform for the SMEs in India through a two-staged framework developed to measure pre-market and post-market underpricing separately and the impact of economic policy uncertainty (EPU) on the IPO returns using the EPU index which is based on newspaper coverage frequency. Further, the long-run performance of SME IPOs and the factors affecting the same have also been analyzed. The two-staged framework is helpful in capturing the impact of different factors separately on the two distinctive markets and providing effective investment strategies to the investors.

A sample of 384 SME IPOs issued during 2012–2018 has been analyzed using robust regression analysis.

The study highlights the fact that there are differences in the factors affecting pre-market and post-market underpricing and reports that investors subscription rate, issue expenses, lead manager reputation and EPU are positively associated, whereas the age of the firm is negatively associated with the pre-market underpricing, and lead manager reputation positively impacts the post-market underpricing whereas issue premium and pre-market underpricing are negatively associated. Pre-market underpricing subsumes all the impact of EPU (publicly available information) in it, hence providing credence to the semi-strong market hypothesis of the Efficient Market Hypothesis (EMH). The long-run performance of SME IPOs increases with time, and lead manager reputation, pre-market and post-market underpricing are positively related to the one-year return whereas issue size, turnover and issue expense are negatively related.

This paper is believed to be the first attempt to analyze the performance of SME IPOs by disaggregating IPO underpricing. The findings of this study will have a great insight for the investors and policymakers.