Eckbo, Masulis, & Norli (2000) question previous examination of initial public offering (IPO) underperformance with the keen argument that the increase in the number of…
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.
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…
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.
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…
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.
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…
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.
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…
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).
Using a sample of 59 Egyptian IPOs, the extent of earnings management was computed using a modified cross‐sectional version of Jones’ model.
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.
The findings could be of assistance to all those involved in IPOs, such as the regulatory authorities and the primary and secondary market investors.
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.
This study examines the impact of the trading volume on Initial Public Offering (IPO) initial return in the context of an emerging market from January 2006 to December…
This study examines the impact of the trading volume on Initial Public Offering (IPO) initial return in the context of an emerging market from January 2006 to December 2016. Models consist of hierarchical and multiple regressions have been evaluated. Our results show, firstly, IPO provides an average of 21.90% of initial return to investors on the first trading day, 9.08% of return on the second day of trading, and 7.12% of return on the third day of return. Secondly, there is a positive relationship between the oversubscription ratio and initial return and no relationship between trading volume and initial return on the first three trading day. Thirdly, the trading volume does not act as a moderator that worsens the relationship between the oversubscription ratio and initial return. Lastly, this study shows that investors should actively participate in the subsequent trading of an IPO. Higher participation will bring greater liquidity and shareholder wealth in the stock market. To the authors' knowledge, this is the first study on the moderating effect of trading volume on IPO initial return in an emerging market.
This study examines whether a regulation on mandatory disclosure of financial forecasts since June 1991 and further sanction imposition since March 1998 contribute to…
This study examines whether a regulation on mandatory disclosure of financial forecasts since June 1991 and further sanction imposition since March 1998 contribute to lower IPO firms’ initial and aftermarket returns, and shorten honeymoon periods. The study is based on 423 IPO firms after the regulation required them to disclose their forecasts and 53 IPO firms prior to the regulation. The findings report that initial and aftermarket returns are lower, and honeymoon periods are shorter in the post‐regulation period than those in the pre‐regulation. The findings also report that initial and aftermarket returns are relatively smaller, and the honeymoon periods are shorter after the March 1998 regulatory sanction was imposed after controlling other variables. These results document that the financial forecasts disclosure regulation evidently contributes to mitigating information asymmetry.
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…
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.
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…
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.
This study examines corporate equity initial public offerings (IPOs) underwritten by Section 20 subsidiaries of commercial banks relative to those underwritten by…
This study examines corporate equity initial public offerings (IPOs) underwritten by Section 20 subsidiaries of commercial banks relative to those underwritten by non‐Section 20 underwriters (investment houses). Consistent with a ‘net certification effect’ for banks, corporate equity IPOs underwritten by Section 20 subsidiaries have lower underpricing than those underwritten by investment houses. Secondly, commercial banks brought a relatively larger proportion of small equity IPO issues to market, during the period of this study. Contrary to the contention that universal banking restricts the availability of financing to small firms, bank underwriting appears to benefit small firms. Further, Section 20s do not increase underwriting fees to offset the effect on potential profits from lower underpricing. This study also finds that the focus of Section 20 on small IPOs results in higher quality for the IPOs they underwrite, as indicated by a lower standard deviation of underpricing.