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1 – 10 of over 80000Poonam Mulchandani, Rajan Pandey and Byomakesh Debata
This paper aims to study the underpricing phenomenon of initial public offerings (IPOs) of 355 Indian companies issued from 2007 to 2019. The research question this paper…
Abstract
Purpose
This paper aims to study the underpricing phenomenon of initial public offerings (IPOs) of 355 Indian companies issued from 2007 to 2019. The research question this paper empirically examines is whether Indian corporate executives deliberately underprice IPOs from its fair value to attract investors, thereby causing an abnormal spike in the prices on the listing day. The findings of this study challenge a commonly held notion of leaving money on the table by IPO issuing companies. Of the overall average listing day returns of 17%, the deliberate premarket underpricing component is found to be mere 5.3%, while the remaining price fluctuation is, inter alia, a result of market momentum along with the unmet demands of impatient investors.
Design/methodology/approach
Following Koop and Li (2001), this study uses Stochastic frontier model (SFM) to study a routine anomaly of disparity between the primary market price (i.e. IPO issue price) and the secondary market price (listing price). The jump in the issue price observed on a listing day is decomposed into deliberate premarket underpricing component that reflects the extent of managerial manipulation and the after-market misvaluation component attributable to information asymmetry and prevailing market volatility.
Findings
This paper uses SFM to bifurcate initial returns into deliberate underpricing by managers and after-market mispricing by noise traders. This study finds that a significant part of the initial return is explained through after-market mispricing. This study finds that average initial returns are 17%, deliberate premarket underpricing is 5.3% and after-market mispricing averages 11.9%.
Research limitations/implications
This study can isolate underpricing done at the premarket by estimating a systematic one-sided error term that measures the maximum predicted issue price deviation from the offered price. Consequentially, the disaggregation of initial returns may be especially informative for retail investors in planning their exit strategy from an IPO by separating the strength of the firm's fundamentals and its causal relationship with the initial returns. Substantial proportion of after-market mispricing implies that future research should focus on factors causing after-market mispricing. As underlying causes are identified, tailor-made policy responses can be formulated to benefit investors.
Practical implications
This paper has empirically validated that initial return is a mix of both components, i.e. deliberate underpricing and aftermarket mispricing. This disaggregation of initial returns can prove helpful for investors in planning their exit strategy. This study can help investors to become more aware of the importance of the fundamentals of the firm and its causal relation with the initial returns. This information in turn can help reduce the information asymmetry amongst investors and help them lessen the costs of adverse selection.
Originality/value
A large number of research studies on IPO pricing find overwhelming evidence of underpricing in public issues. This research attempts to decompose the extent of underpricing into deliberate underpricing and after-market mispricing, thereby supplementing the existing literature on the IPO pricing puzzle. To the best of the authors’ knowledge, this study is the first contribution to the literature on initial return decomposition for the Indian capital markets.
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This paper aims to investigate whether real estate investment trust (REIT) initial public offerings (IPOs) are exposed to abnormal initial-day performance. Previous studies have…
Abstract
Purpose
This paper aims to investigate whether real estate investment trust (REIT) initial public offerings (IPOs) are exposed to abnormal initial-day performance. Previous studies have predominantly focused on REITs listed in the USA and Australia, only a few studies have utilised a multi-country approach and only one study has used a multi-region approach. This paper adds to the literature by, for a global sample, analysing variables proven important in explaining REIT IPO performance but never used in a global sample before by extending the investigation of initial-day return patterns for new REIT types and by offering the first insights from emerging REIT markets.
Design/methodology/approach
Initial-day raw and abnormal returns were calculated for a sample of 445 IPOs in 26 countries over the period from 1996 to 2014. The returns were partitioned according to a select set of themes and multiple regression analysis was used to isolate the relationship between the explanatory factors and underpricing.
Findings
For the sample as a whole, the mean initial-day raw return is 3.94 per cent and the mean market-adjusted initial-day return is 4.01 per cent. Even though the initial-day return for a REIT IPO typically is positive, negative mean returns are observed for a few countries and during certain years. Investors should note that for European markets, new property type exhibited a robust positive association with abnormal return, and underwriter reputation exhibited a robust negative relationship with abnormal return.
Originality/value
This paper fulfils the need to test important concepts on global REIT IPO markets.
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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 operational…
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.
This paper aims to provide empirical evidence on the extent of alteration institutional characteristics, i.e. legal origin and corruption levels, may have on the signaling effects…
Abstract
Purpose
This paper aims to provide empirical evidence on the extent of alteration institutional characteristics, i.e. legal origin and corruption levels, may have on the signaling effects of auditors’ reputation, underwriters’ reputation and ownership retention on initial public offering (IPO) initial returns in OECD countries.
Design/methodology/approach
Cross-sectional data composed of 6,182 IPOs from 30 OECD countries are used for 2003-2012. Ordinary least square with multiple linear regressions is used to test the hypotheses.
Findings
The findings indicate that the legal framework and corruption level of a country alters the signaling effects of underwriters’ reputation, auditors’ reputation and ownership retention in an IPO environment. These three variables mitigate information asymmetry, signal firm value to potential investors and ultimately decrease IPO initial returns. This relationship is more significant in the civil law countries. Corruption levels negatively moderate the relationship in the common law and Scandinavian civil law countries but have no significance in the German and French civil law countries, indicating the importance of the signaling variables in these two civil law countries.
Originality/value
This study examines the extent of the alterations that the legal framework and the corruption levels cause to the signaling relationship between auditors’ reputation, underwriters’ reputation and ownership retention on IPO initial returns in selected OECD countries.
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Many researchers suggest that investment bankers underprice IPOs. However, from 1989 to 1996, all Japanese IPOs were auctioned, reducing the role of underwriters. Initial returns…
Abstract
Many researchers suggest that investment bankers underprice IPOs. However, from 1989 to 1996, all Japanese IPOs were auctioned, reducing the role of underwriters. Initial returns of Japanese price-competitive IPOs are not found lower than underwriter-priced U.S. IPOs. Issue size, firm size, general market movements, insider sales levels, and underwriter quality are not highly related to initial returns under price-competitive auctions. However, there appears to be a strong partial adjustment phenomenon. Thus, price-competitive auctions did not result in significantly lower initial returns, but did reduce the impacts of many traditional variables found to significantly affect initial returns in U.S. underwriter-priced IPOs.
Shaista Wasiuzzaman, Fook Lye Kevin Yong, Sheela Devi D. Sundarasen and Noor Shahaliza Othman
When a firm goes public for the first time, its prospectus serves as an important reference for investors. It is required by regulation that the risk factors which have…
Abstract
Purpose
When a firm goes public for the first time, its prospectus serves as an important reference for investors. It is required by regulation that the risk factors which have significant influence on the business be disclosed in the prospectus. The purpose of this study is to analyze how disclosure of these risk factors influences the initial returns of initial public offerings (IPOs).
Design/methodology/approach
To do this, a sample of 96 Malaysian new equity offerings (IPOs) from year 2009 to year 2013 is used. Ordinary least squares regression technique is used to regress initial returns against risk disclosures. Aside from overall risk disclosure, individual dimensions of risk (internal risk, external risk and investment risk) are also considered.
Findings
Results of the regression analyses reveal a direct relationship between the IPO initial returns and the disclosure of risk. Overall risk disclosure is found to be highly significant in influencing initial returns. However, further investigation into the individual group of risks shows that only investment risk is highly significant in influencing IPO initial returns.
Originality/value
The results found in this study are interesting as, unlike prior studies, it is shown that disclosures of internal and external risks are not significant in influencing investors’ actions possibly because of their generalizability, whereas disclosures related to investment risks are significant. Equity of firms which disclose more of its risk factors can be expected to generate higher initial returns.
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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…
Abstract
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.
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The purpose of this paper is to examine initial and long‐run returns of Japanese IPOs in particular venture capital (VC)‐backed and non‐VC‐backed. The main research focus is on…
Abstract
Purpose
The purpose of this paper is to examine initial and long‐run returns of Japanese IPOs in particular venture capital (VC)‐backed and non‐VC‐backed. The main research focus is on the performance of VC‐backed companies.
Design/methodology/approach
This paper presents a comprehensive long‐run performance analysis. As such, it provides evidence using two performance methods: cumulative abnormal returns (CARs) and buy‐and‐hold return (BHARs). This paper uses updated data from 1998 through 2001 and presents a deeper understanding for the long‐run returns of Japanese IPOs.
Findings
The findings show that there is no statistically significant difference in the initial returns of VC‐backed and non‐VC‐backed companies. The evidence is inconsistent with the VC certification hypothesis that venture capitalists certify the true value of the firm and therefore reduce underpricing. Further, Japanese IPOs underperform in the long‐run. The fads hypothesis is applicable to explain the poor long‐run performance. The results suggest that although VC‐backed companies have high initial returns, they perform significantly worse over a three‐year time horizon than non‐VC‐backed companies.
Research limitations/implications
An examination of the lock‐up agreements is necessary to understand negative returns. The results of this paper provide a good starting point for such a study.
Practical implications
This paper highlights the stock returns of VC‐backed and non‐VC‐backed companies. It is hoped that investors and academics will benefit from the outcome of the current paper.
Originality/value
To date, there is no comprehensive study on the Japanese IPO market applying both CAR and BHAR long‐run measurements. This paper applies both measurements. Further, this is the first study of the long‐run performance of Japanese firms going public in Mothers and in Hercules stock markets.
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Nurwati A. Ahmad-Zaluki and Bazeet Olayemi Badru
This study aims to investigate the effects of the intended use of initial public offerings (IPO) proceeds that is disclosed in the prospectus on IPO initial returns.
Abstract
Purpose
This study aims to investigate the effects of the intended use of initial public offerings (IPO) proceeds that is disclosed in the prospectus on IPO initial returns.
Design/methodology/approach
A sample of IPOs listed on Bursa Malaysia from 2005 to 2015 is used. The intended use of IPO proceeds is categorised into three uses, namely, growth opportunities, debt repayment and working capital. In addition to ordinary least squares regression, the study applies a more sophisticated and robust approach using the quantile regression technique.
Findings
The results show that the intended use of IPO proceeds for growth opportunities and working capital is positively associated with IPO initial returns, whereas debt repayment is negatively associated with IPO initial returns. When the intended use of IPO proceeds for growth opportunities is further expanded into capital expenditure (CAPEX) and research and development (R&D), the intended use of IPO proceeds for CAPEX is positively associated with IPO initial returns, whereas R&D is negatively associated with IPO initial returns.
Research limitations/implications
These findings suggest that intended use of IPO proceeds provides useful information about IPO initial returns and investors can use this information as guidance to make informed decisions. In addition, regulatory authorities should pay close attention to the amount allocated to each intended use of IPO proceeds as this may play a critical role in the success of a company and the economy.
Originality/value
This study gives new empirical evidence on the desire and motivations of IPO and the usefulness of designated use of IPO proceeds disclosed in the prospectus in explaining IPO initial returns.
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Waqas Mehmood, Rasidah Mohd-Rashid, Abd Halim Ahmad and Ahmad Hakimi Tajuddin
The present study investigated the influence of country-level institutional quality on IPO initial return using World Bank Governance indices.
Abstract
Purpose
The present study investigated the influence of country-level institutional quality on IPO initial return using World Bank Governance indices.
Design/methodology/approach
This study analysed 84 IPOs listed on Pakistan Stock Exchange between 2000 and 2017 using cross-sectional data. The impact of country-level institutional quality on IPO initial returns was examined using ordinary least square, robust least square, stepwise least square and quantile regression.
Findings
Empirically, the values of political stability, government effectiveness and regulatory quality were positively significant, whereas rule of law and control of corruption were negatively significant in explaining the intensity of IPO initial return. The results also show the presence of significant risk in the market. Hence, investors were compensated with higher initial returns for weak country-level institutional quality. The results also reveal that improving country-level institutional quality would improve the financial market transparency, thereby reducing IPO initial returns.
Originality/value
No studies have been conducted regarding the influence of country-level institutional quality on IPO initial return in Pakistan. This study is a pioneering study that seeks to give insights into the link between these variables in the context of Pakistan.
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