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Article
Publication date: 7 March 2016

Bill Dimovski

A variety of papers have analyzed the underpricing of REIT IPOs or property company IPOs. The purpose of this paper is to compare the two sectors and examines differences…

621

Abstract

Purpose

A variety of papers have analyzed the underpricing of REIT IPOs or property company IPOs. The purpose of this paper is to compare the two sectors and examines differences in the underpricing of the two types of IPOs.

Design/methodology/approach

An OLS regression is used to identify factors influencing the underpricing of A-REIT and property company IPOs from 1994 until 2014.

Findings

This study finds that A-REIT IPOs have a significantly lower underpricing on average than Australian property company IPOs. The time taken to list appears to influence the underpricing of both A-REIT IPOs and property company IPOs, in that issues that are filled more quickly have higher underpricing but with the magnitude of the impact being less for A-REITs. The sentiment toward the stock market also appears to impact on the underpricing of A-REIT and property company IPOs again with the magnitude of the impact being less for A-REITs.

Practical implications

The paper provides information to new A-REIT and property company issuers, underwriters and investors.

Originality/value

The study is the first to compare and examine the differences in the underpricing of both REITs and property companies in the one country over the same time period.

Details

Journal of Property Investment & Finance, vol. 34 no. 2
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 29 August 2022

Mayank Joshipura, Sachin Mathur and Hema Gwalani

Since 2018, there has been a resurgence in initial public offering (IPO) pricing studies. The authors aim to consolidate the knowledge and explore current dynamics…

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Abstract

Purpose

Since 2018, there has been a resurgence in initial public offering (IPO) pricing studies. The authors aim to consolidate the knowledge and explore current dynamics, understand knowledge progression, elicit trends, and provide future research directions for IPO pricing research.

Design/methodology/approach

The authors conducted a two-stage hybrid review based on 512 high-quality Scopus articles on IPO pricing published over the last decade. The authors deploy bibliometric analysis, and then, based on 61 curated articles, the authors conduct content analysis and offer future research directions.

Findings

Four key research streams emerged: information asymmetry, agency problems, legal, regulatory, and social environment, and behavioral finance. Future research may focus on behavioral explanations for IPO underpricing, the role of investor sentiment in IPO pricing, text analytics, machine learning, and big data in alleviating information asymmetry and agency problems. The authors summarize and present content analysis using the classic Theory, Context, Characteristics, Methods (TCCM) framework.

Research limitations/implications

Using different databases, bibliometric analysis tools, sample period or article screening criteria for the study might give different results. However, the study's major findings are robust to alternative choices.

Practical implications

This study serves as a ready reckoner for the research scholars, practitioners, regulators, policymakers, and investors interested in understanding the nuances of IPO pricing.

Originality/value

The study sheds light on the most influential documents, authors, and journals, offers an understanding of knowledge structure, identifies and discusses primary research streams and related implications, and provides future research directions.

Details

Managerial Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 13 May 2022

Seshadev Sahoo and Rishita Raj

The academic research into underpricing of initial public offerings (IPOs) offers many explanations, i.e. signalling, financial and market hypothesis. However, another set…

Abstract

Purpose

The academic research into underpricing of initial public offerings (IPOs) offers many explanations, i.e. signalling, financial and market hypothesis. However, another set of information, namely, “Qualitative Factors” (along with financial and others), are largely reported by the issuing firms in the prospectus. However, to the best of the authors’ knowledge no such systematic study has been carried out on how firms’ qualitative factors impact the IPO valuation. This paper aims to addresses this gap.

Design/methodology/approach

Using a sample of 82 IPOs issued from 2014 to 2020, we investigate the issuing firm’s pattern of reporting qualitative factors. These qualitative factors are subjected to factor analysis. The authors classify all reported factors across firms into a few categories using principal component analysis. The authors also investigate the impact of these factors on IPO underpricing using OLS regression.

Findings

The authors find that the qualitative information relating to market leadership, established brand image and modern scalable information technology infrastructure significantly influences underpricing. The authors also document that market leadership and brand image are the influential reported quality factors that reduce underpricing. Moreover, location advantage, good customer relationship, established relationship with a client, track record of growth and profitability, experienced promoter and management team failed to influence underpricing.

Originality/value

The outcome of this piece of research offers additional signalling as an attestation of quality for the issue. The authors further argue that the amount of qualitative information disclosed by the managers in the prospectus to support the pricing should not be ignored.

Details

Pacific Accounting Review, vol. 34 no. 5
Type: Research Article
ISSN: 0114-0582

Keywords

Book part
Publication date: 1 January 2006

Yong Wang and Xiaotian (Tina) Zhang

Initial public offering (IPO) underpricing remains a puzzle after decades of investigation. The stock markets in emerging economies are attractive to international…

Abstract

Initial public offering (IPO) underpricing remains a puzzle after decades of investigation. The stock markets in emerging economies are attractive to international investors but their unique characteristics need to be examined. Chinese stock markets experienced much more significant IPO underpricing than most other stock markets in the world. This paper offers a two-period wealth maximum model to explain the strategic IPO underpricing by state owners. Given the fact that the entire IPO procedure, including IPO price, is regulated and controlled by state owners, we argue that state owners strategically underprice the IPO, because they care less about the IPO proceeds but more about the wealth gain after IPO. The empirical finding of a positive relationship between IPO underpricing and state ownership in Chinese stock market is consistent with the wealth maximization hypothesis of IPO pricing. The paper offers better understanding for IPO procedure of state-owned enterprises in emerging markets.

Details

Value Creation in Multinational Enterprise
Type: Book
ISBN: 978-1-84950-475-1

Article
Publication date: 3 June 2022

Syafiq Mahmadah Hanafi and Mamduh M. Hanafi

This study aims to investigate the effect of shariah status on initial public offering (IPO) underpricing, long-term performance and relationship between short-term and…

Abstract

Purpose

This study aims to investigate the effect of shariah status on initial public offering (IPO) underpricing, long-term performance and relationship between short-term and long-term IPO performance, and attempt to gain an insight into the nature of shariah IPO underpricing: a signal or an overreaction.

Design/methodology/approach

This study uses IPOs during 1990–2018 from Indonesia. This study uses clustered regressions to address clustering phenomenon in IPO. To investigate long-term performance, this study uses cumulative returns, cumulative abnormal returns and Fama–French three factor regressions. This study also runs cross-sectional regressions on the relationship between short and long-term performances.

Findings

This study finds that shariah status reduces lowers non-trading returns (return from offer to open prices), suggesting that shariah status may reduce information asymmetry and compensation. This study finds that both shariah and non-shariah IPOs underperform the benchmarks, with shariah IPOs underperform more. Further analysis shows a negative relationship between initial return and long-term performance for both shariah and non-shariah IPOs, whereas the negative relationship is stronger for shariah IPOs. The results indicate that shariah compliance help reduce information asymmetry; however, shariah compliance does not necessarily signal quality. Instead, shariah compliance seems to induce investor sentiment, resulting in underperformance and reversal patterns in the long run.

Research limitations/implications

The results have various implications. Issuers may use shariah screening to lower underpricing. Investors may manage their investment horizons to mitigate IPO underperformance. Future research is needed to understand the nature of short and long-term performance of shariah IPO across countries. The use of ex-ante shariah definition becomes our limitation. This study also does not use buy and hold return to investigate long-term performance.

Practical implications

The results have various implications. Issuers may use shariah screening to lower underpricing. The results show that sharia certification may play an important role in the IPO process. However, sharia status induces individual investors, leading to more overreaction in the long term. Thus, companies need to balance between sharia certification and overreaction in the long term. Investors may manage their investment horizons to mitigate IPO underperformance.

Originality/value

This paper extends studies on the effect of shariah status on IPO performance using Indonesia data. Using non-trading returns, this study provides sharper analysis on the underpricing study. This study shows that shariah status leads to an overreaction, instead of a signal for quality.

Details

Journal of Islamic Accounting and Business Research, vol. 13 no. 7
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 17 May 2022

Fouad Jamaani, Manal Alidarous and Esraa Alharasis

This study aims to examine the impact of the International Financial Reporting Standards (IFRS) mandate and differences in national institutional quality on the…

Abstract

Purpose

This study aims to examine the impact of the International Financial Reporting Standards (IFRS) mandate and differences in national institutional quality on the underpricing of Initial Public Offering (IPO) companies.

Design/methodology/approach

Multiple Difference-in-Differences (DiD) ordinary least squares estimations were conducted for 100 corporations listed on the Saudi Arabian stock market using country-level institutional quality data from 2005 to 2017.

Findings

IFRS requirements and improvements in institutional quality have a combined effect on minimizing IPO underpricing. The analysis of the combined impact of IFRS requirements and differences in transparency revealed that IPO vendors leave $5 on average for IPO investors to cash out post the IFRS mandate, compared to $29 previously. Thus, IFRS serves as a quality certification instrument that alleviates IPO investors’ ex ante uncertainties, even in nations with undeveloped institutions.

Practical implications

The findings may be beneficial to researchers and policymakers. The results suggest that institutional quality enhancements and obligatory IFRS implementation highlight IFRS’s synergistic influence on the IPO market. While European harmonization efforts drove the adoption of IFRS in Europe in 2005, Saudi Arabia’s adoption of IFRS is not being driven by such initiatives (Daske et al., 2008; Persakis and Iatridis 2017). In reality, when IFRS was officially imposed in Saudi Arabia in 2008, it, like many other emerging market nations, made considerable reforms to its formal institutions. However, research on the combined impact of IFRS and disparities in institutional quality in emerging IPO markets remains sparse. Emerging markets represent more than half of economies that use IFRS. Therefore, to the best of the authors’ knowledge, this study is the first to conduct an empirical investigation to identify this combined effect in emerging countries using the DiD analytical technique. Equity market legislators remain concerned regarding IPO underpricing, as it has a detrimental influence on economic growth (Bova and Pereira, 2012; Jamaani and Ahmed, 2021; Mehmood et al., 2021). Depending on the degree of information asymmetry in national stock markets, underpricing costs increase the cost of going public for entrepreneurs. Consequently, prospective private firms are discouraged from accessing equity financing through the stock markets. This is likely to impede private sector development plans, causing a negative effect on economic growth.

Originality/value

Emerging countries represent over 50% of the IFRS mandating economies. However, there is insufficient research on the combined effect of IFRS requirements and improvements in institutional quality in developing IPO markets. To the best of the authors’ knowledge, this study is the first empirical attempt to identify this combined effect in one of the largest developing countries. The results may aid academics and policymakers in better understanding the interaction between these two variables.

Article
Publication date: 11 November 2021

Nino Martin Paulus, Marina Koelbl and Wolfgang Schaefers

Although many theories aim to explain initial public offering (IPO) underpricing, initial-day returns of US Real Estate Investment Trust (REIT) IPOs remain a “puzzle”. The…

Abstract

Purpose

Although many theories aim to explain initial public offering (IPO) underpricing, initial-day returns of US Real Estate Investment Trust (REIT) IPOs remain a “puzzle”. The literature on REIT IPOs has focused on indirect quantitative proxies for information asymmetries between REITs and investors to determine IPO underpricing. This study, however, proposes textual analysis to exploit the qualitative information, revealed through one of the most important documents during the IPO process – Form S-11 – as a direct measure of information asymmetries.

Design/methodology/approach

This study determines the level of uncertain language in the prospectus, as well as its similarity to recently filed registration statements, to assess whether textual features can solve the underpricing puzzle. It assumes that uncertain language makes it more difficult for potential investors to price the issue and thus increases underpricing. Furthermore, it is hypothesized that a higher similarity to previous filings indicates that the prospectus provides little useful information and thus does not resolve existing information asymmetries, leading to increased underpricing.

Findings

Contrary to expectations, this research does not find a statistically significant association between uncertain language in Form S-11 and initial-day returns. This result is interpreted as suggesting that uncertain language in the prospectus does not reflect the issuer's expectations about the company's future prospects, but rather is necessary because of forecasting difficulties and litigation risk. Analyzing disclosure similarity instead, this study finds a statistically and economically significant impact of qualitative information on initial-day returns. Thus, REIT managers may reduce underpricing by voluntarily providing more information to potential investors in Form S-11.

Practical implications

The results demonstrate that textual analysis can in fact help to explain underpricing of US REIT IPOs, as qualitative information in Forms S-11 decreases information asymmetries between US REIT managers and investors, thus reducing underpricing. Consequently, REIT managers are incentivized to provide as much information as possible to reduce underpricing, while investors could use textual analysis to identify offerings that promise the highest returns.

Originality/value

This is the first study which applies textual analysis to corporate disclosures of US REITs in order to explain IPO underpricing.

Details

Journal of Property Investment & Finance, vol. 40 no. 6
Type: Research Article
ISSN: 1463-578X

Keywords

Article
Publication date: 5 July 2021

Waqas Mehmood, Rasidah Mohd-Rashid, Ahmad Hakimi Tajuddin and Hassan Mujtaba Nawaz Saleem

This study aims to investigate the effect of Shariah-compliant status and Shariah regulation on initial public offering (IPO) underpricing in Pakistan.

Abstract

Purpose

This study aims to investigate the effect of Shariah-compliant status and Shariah regulation on initial public offering (IPO) underpricing in Pakistan.

Design/methodology/approach

Besides the ordinary least square’s method, this study used quantile least squares as a robust approach and stepwise regression for further analysis to investigate the underpricing phenomenon in Pakistan. Data of 84 IPOs listed on Pakistan Stock Exchange from January 2000 to December 2018 were collected to determine the impact of Shariah-compliant status and Shariah regulation on IPO underpricing.

Findings

Results of the study show that Shariah-compliant status has a negative relationship but Shariah regulation has a positive relationship with IPO underpricing. Hence, it is contended that Shariah-compliant firms have lower asset volatility and uncertainty than non-Shariah-compliant firms because of less information asymmetry, resulting in lower underpricing. These Shariah-compliant firms provide signals of high-quality IPOs as they must comply with the strict guidelines issued by the Securities Exchange Commission of Pakistan in addition to being considered as amicable by investors. Further, this study suggests that investors are more attracted to Shariah-compliant firms than non-Shariah-compliant ones.

Research limitations/implications

This study’s offers limited consideration of nonfinancial and financial characteristics that could influence the decision of investors to subscribe to IPOs. Besides, future studies could consider the screening benchmarks; for instance, debt and cash may explain the intensity of IPO initial return in Pakistan.

Originality/value

The present work empirically investigated the influence of Shariah-compliant status and Shariah regulation on IPO underpricing in Pakistan’s IPO market, which has been scarcely covered in the existing literature.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 14 no. 5
Type: Research Article
ISSN: 1753-8394

Keywords

Article
Publication date: 30 March 2021

Yuxin Wang and Guanying Wang

The purpose of this paper is to explore how the price limit policy implemented in 2014 affects initial public offering (IPO) underpricing and long-term performance in China.

Abstract

Purpose

The purpose of this paper is to explore how the price limit policy implemented in 2014 affects initial public offering (IPO) underpricing and long-term performance in China.

Design/methodology/approach

The data are the IPOs from Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) between 2004 and 2018. The data are firstly divided into the IPOs before the price limit policy and the IPOs after the price limit policy according to the time of issuance. Then the two groups are divided into 4 subsamples according to the market blocks and the P/E ratio. The authors use multiple regression models to explore the effect of price limit policy in each subsample.

Findings

The first-day price limit system for IPOs is similar to the upward fuse mechanism, the purpose of which is to suppress IPO underpricing. However, this study finds that the policy does not suppress IPO underpricing, but increases the underpricing rate in all subsamples. Besides, the long-term performance in each subsample is different from each other. Main Board stocks’ long-term performance is worse after the policy. The policy makes Small and Medium Enterprise Board (SME Board) and Growth Enterprise Market Board (GEM Board) stocks with high P/E ratios perform better in the long term. For SME Board and GEM Board stocks with low P/E ratios, the policy makes no significant effect.

Practical implications

Good policy intentions may sometimes lead to counterproductive effects. However, since the long-term performance of each subsample is different, it is difficult to judge whether the policy should continue to be implemented or cancelled. Implementing different policies for different subsamples may be a better way to solve this problem.

Originality/value

This paper contributes to the study of IPO underpricing and long-term performance from the perspective of price limit policy.

Details

Managerial Finance, vol. 47 no. 9
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 17 June 2008

Thomas Walker

We study the relationship between underwriter prestige, family control, and IPO underpricing in an international setting. Data are collected for 5,789 firms that went…

Abstract

We study the relationship between underwriter prestige, family control, and IPO underpricing in an international setting. Data are collected for 5,789 firms that went public across twenty‐five countries between 1995 and 2002. We find that non‐penny‐stock and non‐U.S. IPOs from countries where firms are predominately family‐controlled benefit from associations with well‐known investment bankers; i.e., these firms are less underpriced than similar firms from countries with a low level of family control. At the same time, our findings support prior evidence that suggests that underwriter prestige is positively related to underpricing in the U.S. IPO market. Family‐controlled firms should consider the findings of this study, which identifies factors that are associated with more successful IPO outcomes.

Details

Multinational Business Review, vol. 16 no. 2
Type: Research Article
ISSN: 1525-383X

Keywords

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