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Article
Publication date: 1 January 2004

Ashley Burrowes, Horst Feldmann, Mareile Feldmann and John MacDonald

Eckbo, Masulis, & Norli (2000) question previous examination of initial public offering (IPO) underperformance with the keen argument that the increase in the number of…

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1179

Abstract

Eckbo, Masulis, & Norli (2000) question previous examination of initial public offering (IPO) underperformance with the keen argument that the increase in the number of traded shares and the infusion of equity reduce two significant premia in the stock’s return, namely, liquidity risk and financial risk. The new market for high (expected) growth stock in Germany is examined for evidence of underpricing, underperformance, and liquidity improvements during the first two complete years of operation – 1998 and 1999. The initial trading period examines the offering day and also the first ten days of trading (for the investor who can not get allocation but enters the secondary market). The postissue performance study period is taken as the 5‐day period one‐year after the IPO. Using regression of four underpricing measures upon issuing firm characteristics deemed important from the extant literature, we seek to explain the degree of underpricing discovered. We find that substantial underpricing occurs and performance is high one year later, even adjusted for the German market return for the period or the firm‐specific sector performance for the same period. Trading dwindles for most stocks after the offering day. One year later, the trading of the stock is even lower. We do find that the more active the trading in the initial period, the greater the returns and trading one year after.

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Managerial Finance, vol. 30 no. 1
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 January 2003

SHANTARAM P. HEGDE and SANJAY B. VARSHNEY

We argue that uninformed subscribers to an initial public offering (IPO) of common stocks are exposed to greater ex ante risk of trading against informed traders in the…

Abstract

We argue that uninformed subscribers to an initial public offering (IPO) of common stocks are exposed to greater ex ante risk of trading against informed traders in the secondary market because the advent of public trading conveys hitherto private information and thereby mitigates adverse selection. The going‐public firm underprices the new issue to compensate uninformed subscribers for this added secondary market adverse selection risk. We test this market liquidity‐based explanation by investigating the ex‐post consequences of ownership structure choice on the initial pricing and the secondary market liquidity of a sample of initial public offerings on the New York Stock Exchange (NYSE). Consistent with our argument, we find that initial underpricing varies directly with the ex post trading costs in the secondary market. Further, initial underpricing is related positively to the concentration of institutional shareholdings and negatively to the proportional equity ownership retained by the founding shareholders. Finally, the secondary market illiquidity of new issues is positively related to institutional ownership concentration and negatively to ownership retention and underwriter reputation. Thus, the evidence based on our NYSE sample supports the view that the entrepreneurs' choice of ownership structure affects both the initial pricing and the subsequent market liquidity of new issues.

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Studies in Economics and Finance, vol. 21 no. 1
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 1 January 2002

Jarrod Johnston and Jeff Madura

Roll‐up initial public offerings (IPOs) create a company to consolidate a number of smaller companies in a fragmented industry. The company that results has limited…

Abstract

Roll‐up initial public offerings (IPOs) create a company to consolidate a number of smaller companies in a fragmented industry. The company that results has limited operational experience and must combine several small and diverse companies. These characteristics may increase the uncertainty of the offer. We find that roll‐up IPOs have higher initial returns than traditional IPOs, implying additional uncertainty. Additionally, roll‐up IPOs do not perform as poorly as other IPOs over the long run. This may be due to benefits from economies of scale and a higher degree of monopoly power.

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Studies in Economics and Finance, vol. 20 no. 1
Type: Research Article
ISSN: 1086-7376

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Book part
Publication date: 1 October 2015

Reza Houston and Stephen P. Ferris

In this study, we examine the relationship between political connections of private firms and the initial public offering process. Using registration statement…

Abstract

In this study, we examine the relationship between political connections of private firms and the initial public offering process. Using registration statement information, we create a unique database of politically connected IPO firms. We find that political connections are substitutes to high-quality underwriters and big four auditors. Politically connected firms manage earnings more highly upward than non-connected firms prior to the public offering. Politically connected firms also exhibit less underpricing than non-connected firms. Finally, politically connected IPO firms have superior post-IPO returns relative to non-connected IPO firms.

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International Corporate Governance
Type: Book
ISBN: 978-1-78560-355-6

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Article
Publication date: 1 October 2004

Nickolaos V. Tsangarakis

This study examines the price performance of Greek IPOs in the period 1993‐1997. The Greek IPO market presents several particularities in respect to regulation and…

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1591

Abstract

This study examines the price performance of Greek IPOs in the period 1993‐1997. The Greek IPO market presents several particularities in respect to regulation and procedural arrangements that make its study interesting in the context of the international evidence regarding IPO price performance. We find that Greek IPOs had on average large positive initial returns, an evidence of under pricing. This evidence is also supported by the positive one‐year returns in relation to offer prices. Returns computed one year after listing in relation to the first trading day price are positive, inconsistent with international evidence. Annual analysis reveals, however, differential patterns in price behavior.

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Managerial Finance, vol. 30 no. 10
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 February 2002

M. Banu Durukan

Reviews previous research on initial public offering (IPO) pricing and performance, classifying it by six hypotheses which are not mutually exclusive. Uses 1990‐1997 data…

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3706

Abstract

Reviews previous research on initial public offering (IPO) pricing and performance, classifying it by six hypotheses which are not mutually exclusive. Uses 1990‐1997 data on IPOs on the Istanbul Stock Exchange to test these hypohteses, explains the methodology and presents the results, which show initial abnormal returns (realized by investors), but no long run underperformance of the market. Analyses the factors affecting short and long run IPO returns, considers consistency with other research and supports the winner’s curse and the fads hypotheses. Concludes that initial abnormal returns are due to both deliberate underpricing and overvaluation by investors’ and that factors which decrease uncertainty lead to lower returns.

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Managerial Finance, vol. 28 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 29 June 2012

Hany Kamel

The purpose of this paper is to empirically investigate the phenomenon of earnings management in the Egyptian initial public offerings (IPO) market where most of the IPOs…

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1048

Abstract

Purpose

The purpose of this paper is to empirically investigate the phenomenon of earnings management in the Egyptian initial public offerings (IPO) market where most of the IPOs were the privatisations of state‐owned enterprises (SOEs).

Design/methodology/approach

Using a sample of 59 Egyptian IPOs, the extent of earnings management was computed using a modified cross‐sectional version of Jones’ model.

Findings

The initial results do not provide support for the hypothesis that Egyptian IPO firms tend to overstate their earnings before the IPO date. However, when the sample firms were classified under two groups based on the pre‐IPO discretionary accruals, the results illustrate that most privately‐owned companies were found among those which contemplate to aggressively manage earnings upwards in order to maximise the IPO proceeds, whereas privatised public enterprises were found with no systematic pattern of earnings manipulation. The results also demonstrate that pre‐offering discretionary accruals do not explain the post‐offering underperformance in earnings but predict a portion of the subsequent poor share returns performance.

Practical implications

The findings could be of assistance to all those involved in IPOs, such as the regulatory authorities and the primary and secondary market investors.

Originality/value

With a few exceptions, most of the literature on earnings management has been based on the US data. Therefore, it is hoped that undertaking a research in a country such as Egypt, where the shareholding structures of most Egyptian IPO companies were concentrated in the hands of the state before going public, may reveal a different perception of earnings management and help determine whether this setting would lead to a higher or lower propensity for earnings management.

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Journal of Accounting in Emerging Economies, vol. 2 no. 2
Type: Research Article
ISSN: 2042-1168

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Article
Publication date: 18 January 2008

Steven L. Jones and John C. Yeoman

The purpose of this paper is to analyze the OpenIPO process, vis‐à‐vis traditional bookbuilding, and evaluate the suitability of the OpenIPO for various types of…

Abstract

Purpose

The purpose of this paper is to analyze the OpenIPO process, vis‐à‐vis traditional bookbuilding, and evaluate the suitability of the OpenIPO for various types of companies, market conditions, and assets.

Design/methodology/approach

This paper develops the pros and cons of the OpenIPO process, vis‐à‐vis the traditional bookbuilding method, in light of the recent academic literature on securities auctions and the results of the OpenIPOs Hambrecht has conducted, as of mid‐2004.

Findings

The main advantage of the OpenIPO process is that it precludes many of the abuses recently observed in investment banking; however, it is not well suited for complex businesses that are either difficult to value or far removed from the public eye.

Research limitations/implications

Only nine OpenIPOs have been conducted by Hambrecht, or using the Hambrecht method, as of the completion of this paper in mid‐2004.

Practical implications

The paper foresees the OpenIPO process of Hambrecht as supplementing, rather than supplanting, the traditional bookbuilding method. This could come about through the emergence of the OpenIPO as a more viable alternative to bookbuilding, or possibly through some hybrid type of offering in which individual investors play a larger role in price discovery, via the internet, and shares are allocated through both the internet auction and traditional bookbuilding.

Originality/value

Managers considering an initial public offering have a choice between the OpenIPO process of Hambrecht, used in the Google offering, and the traditional bookbuilding process. The choice of the OpenIPO has become more viable not only because of the Google offering, but due to the severe criticism the traditional method has received in recent years for alleged abuses related to the pricing and allocation of shares. This paper assists managers in evaluating this choice IPO offer type while rigorously evaluating the pros and cons of the OpenIPO process and its likely future role in the investment banking industry.

Details

Managerial Finance, vol. 34 no. 2
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 1 January 2009

Ira W. Lieberman, Anne Anderson, Zach Grafe, Bruce Campbell and Daniel Kopf

Within the past few years, a new phenomenon has taken place among the world's leading microfinance institutions (MFIs) – entry into new capital markets through initial

Abstract

Within the past few years, a new phenomenon has taken place among the world's leading microfinance institutions (MFIs) – entry into new capital markets through initial public offerings (IPOs). “Going public” launches MFIs into a new frontier, not only presenting challenges but also providing new opportunities for the institutions and the clients they serve.

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Moving Beyond Storytelling: Emerging Research in Microfinance
Type: Book
ISBN: 978-1-84950-682-3

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Article
Publication date: 14 June 2018

Tom W. Miller

The purpose of this paper is to use fundamental models incorporating structural relationships within the firm in a terminal value model for the second stage of a two-stage…

Abstract

Purpose

The purpose of this paper is to use fundamental models incorporating structural relationships within the firm in a terminal value model for the second stage of a two-stage valuation model utilized to estimate the value of a company.

Design/methodology/approach

The innovation is that growth options are identified within the structural relationships and a model capturing the value of the optionality is incorporated in the second stage of the two-stage valuation model.

Findings

Significant outcomes are that terminal value is shown to be a large portion of a company’s total value and the price behavior for initial public offerings produced by the model is consistent with the result of empirical studies.

Originality/value

This paper explicitly incorporates growth options in the second stage of a two-stage valuation model for the firm.

Details

Studies in Economics and Finance, vol. 35 no. 2
Type: Research Article
ISSN: 1086-7376

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