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Article
Publication date: 6 June 2016

Mohammed Abdullah Ammer and Nurwati A. Ahmad-Zaluki

Underpricing is one of the most important anomalies associated with initial public offerings (IPOs). The purpose of this paper is twofold; first, it examines the impact of…

Abstract

Purpose

Underpricing is one of the most important anomalies associated with initial public offerings (IPOs). The purpose of this paper is twofold; first, it examines the impact of underwriter’s market share and spread on the underpricing of IPOs; and second, it investigates the effect of management earnings forecasts bias and accuracy on the underpricing of IPOs.

Design/methodology/approach

A sample of 190 Malaysian IPOs listing on the main market of Bursa Malaysia from January 1, 2002 to February 29, 2012 was used and collected data were analyzed through univariate analysis and pooled ordinary least squares regression.

Findings

The empirical evidence shows that IPOs underwritten by underwriters as having high market share and charging low underwriting spread experience higher level of underpricing. The paper also finds that IPOs issued more biased earnings forecasts are related with severe underpricing. Finally, this paper reveals that the more accurate the earnings forecasts are, the more minimized will be the asymmetric information and hence, the less will be IPO underpricing.

Practical implications

The paper has some implications for policy makers, investors and underwriters. First, this study offers some insights for policy makers who are responsible for Malaysian financial markets current reforms. Further, knowing the importance of the economic outcomes of the earnings forecasts on underpricing for policy makers, they may adopt the findings in their discussion of costs of litigation and potential modifications in the requirements of issuing earnings forecasts. For the investors, findings may improve their understanding of equity valuation and for the underwriters, it would assist them in identifying underwriting cost.

Originality/value

This paper is considered the first study to extend IPO literature by investigating the relationships between underwriter’s market share, underwriter’s spread, earnings forecasts bias, earnings forecasts accuracy and IPO underpricing in an emerging country, such as Malaysia.

Details

International Journal of Managerial Finance, vol. 12 no. 3
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 7 September 2015

Michele Meoli, Andrea Signori and Silvio Vismara

– The purpose of this paper is to relate the fees paid to IPO underwriters to the nature and quality of the services they provide.

Abstract

Purpose

The purpose of this paper is to relate the fees paid to IPO underwriters to the nature and quality of the services they provide.

Design/methodology/approach

Controlling for the characteristics of the firm going public, the risk associated with the offering, and the reputation of the underwriter, the authors study on a sample of Italian IPOs whether a formal commitment by underwriters to provide ancillary services allows them to charge higher fees.

Findings

The authors document that asking underwriters to stabilize stock price is costly to the issuer, while to support liquidity is not. The authors’ also show that underwriters stabilize IPOs that really need it, whereas the provision of liquidity support does not seem to be always aligned with the issuer’s interest.

Originality/value

Investigating the Italian underwriting market is instructive for two main reasons. First, the institutional setting in IPOs is similar to most continental European countries, but significantly different from the US market. For instance, allocation policies in US IPOs are discretionary for both retail and institutional investors, while in Europe shares cannot be discretionarily allocated to retail investors. Second, the Italian market offers the opportunity to study the going-public decision outside the typical Anglo-Saxon financial systems. This is of interest because while both the UK and the USA have well-developed equity markets and a related industry of financial intermediation centered on providing equity, our analysis sheds light on financial intermediation of IPOs in a bank-centered system.

Details

International Journal of Managerial Finance, vol. 11 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 1 June 2005

Mingsheng Li, Steven Xiaofan Zheng and Melissa V. Melancon

To test the effects of underpricing and share retention (i.e. the proportion of shares retained by the pre‐initial‐public‐offering (IPO) owners) on IPO aftermarket liquidity.

Abstract

Purpose

To test the effects of underpricing and share retention (i.e. the proportion of shares retained by the pre‐initial‐public‐offering (IPO) owners) on IPO aftermarket liquidity.

Design/methodology/approach

Uses both percentage spread and turnover ratio to measure liquidity. The percentage spread is the quoted bid‐ask spread divided by the quoted midpoint and measures the trading cost relative to share price. Turnover ratio is the daily trading volume divided by the number of shares offered and measures the speed of transaction. Both non‐parametric analyses and multiple regressions are conducted to investigate the effects of underpricing and share retention on liquidity.

Findings

Results indicate that initial return is positively related to turnover ratio and negatively related to percentage spread. These relations are significant even after controlling for other factors. Also finds that the pre‐IPO owners’ retention rate is positively related to turnover ratio and negatively related to percentage spread. High retention rates attract more trades, provide quality assurance, and improve IPO aftermarket liquidity.

Originality/value

This paper investigates the theoretical links between underpricing and liquidity and provides direct evidence on Booth and Chua's liquidity theory. In addition, this is one of the first empirical studies to analyze the effect of share retention on aftermarket liquidity.

Details

International Journal of Managerial Finance, vol. 1 no. 2
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 21 November 2016

Chao Chen and Xinrong Wang

The purpose of this paper is to analyze the effect of the reputation of underwriters and sponsoring representatives on initial public offering (IPO) underwriting fees, and

Abstract

Purpose

The purpose of this paper is to analyze the effect of the reputation of underwriters and sponsoring representatives on initial public offering (IPO) underwriting fees, and further investigates the role of ownership and political connection.

Design/methodology/approach

The methodology includes three models. Model 1 empirically investigates the effect of underwriter’s reputation on underwriting fee. Model 2 studies the effect of sponsoring representative’s reputation on underwriting fee. Model 3 further examines the effect of underwriter’s reputation and sponsoring representative reputation on the underwriting fee controlling for the impact of ultimate controlling ownership and political connection.

Findings

The study documents that underwriters’ and sponsoring representatives’ reputation can result in reputational premiums. In the IPO of state-owned enterprises (SOEs), the reputation of underwriters and sponsoring representatives does not significantly affect the underwriting fees. In the IPO of non-state-owned enterprises (NSOEs), there is a significantly positive correlation between underwriters’ and sponsoring representatives’ reputation and underwriting fees. Further research results show that, on the one hand, the effect of underwriters’ and sponsoring representatives’ reputation on underwriting fees is not significant in the IPO of NSOEs with political connection. On the other hand, underwriting fees are positively associated with underwriters’ and sponsoring representatives’ reputation in the IPO of NSOEs without political connection.

Research limitations/implications

The sponsoring representative’s fee is not disclosed separately, which makes it difficult to distinguish the incremental effect from underwriter’s services and reputation.

Practical implications

NSOEs relative to SOEs are more likely to pay higher underwriting fees for hiring underwriter and sponsoring representative with better reputation during the process of IPO.

Social implications

The reputation of underwriter and sponsoring representative does not matter to SOEs but does matter to NSOEs. However, NSOEs’ political connection affects underwriter fees.

Originality/value

This paper provides new evidence of sponsoring representatives’ reputation and political connection on the underwriting fees in the IPO in Chinese SOEs and NSOEs.

Details

China Finance Review International, vol. 6 no. 4
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 4 April 2008

Katsushi Suzuki

The purpose of this paper is to empirically examine the relationship between the level of underwriter spread and ownership structure by using data from Japanese IPO firms…

Abstract

Purpose

The purpose of this paper is to empirically examine the relationship between the level of underwriter spread and ownership structure by using data from Japanese IPO firms that are issued during the years 1997‐2002.

Design/methodology/approach

The paper uses regression analysis to determine the effect of the ownership structure (board, bank, affiliated venture capital firms) on underwriter spread and on the post‐issue operating performance of IPO firms.

Findings

This paper finds several results that are in contrast with previous studies. The ownership by board members is positively associated with the level of gross spread but is not associated with post‐issue operating performance. The presence of a commercial bank in the ownership structure of IPO firms decreases the gross spread and increases the post‐issue operating performance of IPO firms. Issuers pay a lower underwriting fee as the ownership share of the lead underwriter‐affiliated VC increases, unlike that of other VCs.

Originality/value

The results of this paper, supporting certification and monitoring hypotheses, contribute to academic research. Most previous studies do not support certification effects.

Details

International Journal of Managerial Finance, vol. 4 no. 2
Type: Research Article
ISSN: 1743-9132

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Book part
Publication date: 4 March 2008

Mukesh Bajaj, Andrew H. Chen and Sumon C. Mazumdar

Chen and Ritter (2000) documented that underwriter spreads for recent US initial public offerings (IPOs) in $20 million range as well as much larger IPOs in the $80…

Abstract

Chen and Ritter (2000) documented that underwriter spreads for recent US initial public offerings (IPOs) in $20 million range as well as much larger IPOs in the $80 million range are clustered at 7%. This observation has led to a Department of Justice (DOJ) enquiry into potential price fixing by underwriters. We demonstrate through a times series analysis that IPOs have tripled in size and become much riskier over time. A pooled data analysis can therefore mask evidence of competition in the market. We find that spread clustering is not a recent phenomenon. Over time, clustering at 7% has increased as clustering above 7% has declined. IPO spreads have declined significantly over time as the firms going public more recently are riskier, underwriting efforts have increased and recent IPOs are much larger than IPOs in the past. Controlling for time trends, larger IPOs have lower average spreads. The market for underwriting IPOs seems to be competitive with entry of new firms during the hot markets.

Details

Research in Finance
Type: Book
ISBN: 978-1-84950-549-9

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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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Article
Publication date: 15 May 2007

Marc Goergen, Arif Khurshed and Ram Mudambi

The aim of the paper is to study the long‐run under‐performance of UK initial public offerings (IPOs) by relating it to the pre‐IPO financial performance of the firm as…

Abstract

Purpose

The aim of the paper is to study the long‐run under‐performance of UK initial public offerings (IPOs) by relating it to the pre‐IPO financial performance of the firm as well as the managerial decisions taken before the IPO.

Design/methodology/approach

The three‐year share returns of UK IPOs is studied using various methodologies such as buy and hold returns, cumulative abnormal returns and Fama and French three‐factor returns.

Findings

It was found that the percentage of equity issued and the degree of multinationality of a firm are the key predictors of its performance after the IPO. It is also found that small firms behave differently from large firms and suffer from worse long‐run performance than large firms.

Research limitations/implications

There is a great need for future research to focus on ownership structure and long‐run returns. Further, a focus on the level of debt and venture capital financing in the pre‐IPO period may also uncover important relationships with the long‐run performance of a firm.

Practical implications

The results obtained from this study provide important information for the prospective long term investors in new issues. While pre‐IPO performance of a firm cannot predict the post‐IPO performance with certainty, nevertheless the results of this study suggest that long‐term investors should show caution while deciding on long term investment in IPO firms.

Originality/value

The paper explains the post‐IPO underperformance of firms by relating it to the pre‐IPO managerial decisions made in the firm. It also documents the role of multinationality in explaining long run underperformance.

Details

Managerial Finance, vol. 33 no. 6
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 5 February 2018

Bazeet Olayemi Badru and Nurwati A. Ahmad-Zaluki

The purpose of this paper is to investigate whether proxies considered under ex ante uncertainty hold true under a fixed price mechanism structure. In particular, the…

Abstract

Purpose

The purpose of this paper is to investigate whether proxies considered under ex ante uncertainty hold true under a fixed price mechanism structure. In particular, the study examines whether pre-initial public offering (IPO) financial performance, measured by Altman Z-score, can serve as a proxy for ex ante uncertainty or signalling in an IPO market where a fixed price mechanism is used to determine the offer price.

Design/methodology/approach

This study uses solely ex ante information available to prospective investors prior to the IPO to proxy for ex ante variables. It also applies a more sophisticated and robust approach using quantile regression (QR) technique in addition to ordinary least squares (OLS) regression. Applying the QR technique allows the study to produce estimates for the conditional quantiles of the distribution of IPO initial returns and address the violations of basic assumptions of the standard OLS technique.

Findings

The results show that for ex ante variables, such as IPORISK, company size, the Altman Z-score measure of pre-IPO performance, audit quality and the technology industry, are significantly related to IPO initial returns. However, the relationship differs across the conditional quantiles of the distribution of IPO initial returns, which would not have been recognised using standard OLS. However, the sign of the coefficients shown by some of these variables contradicts the ex ante uncertainty hypothesis assumption, but they are found to have predictive power in explaining IPO initial returns. These findings reveal unique characteristics of the IPO process and investors in Malaysia. Most importantly, the Altman Z-score is found to be significant in the lower and upper quantiles, but insignificant around the median quantile, which implies that Altman Z-score is important for IPOs with low and high initial returns.

Research limitations/implications

These findings suggest that theoretical explanations of the ex ante uncertainty hypothesis cannot be generalised across financial markets, particularly in the Malaysian IPO market where fixed price offerings are common, and investors are risk averse, whereby they avoid risky IPOs, and prefer to take a small amount of returns against high risks. In addition, the composition of the companies in the market is not as large as the developed markets. This implies that the share price of the IPO may be sensitive to other disclosures in the prospectus, market sentiments or financial news. This study recommends the need for more empirical evidence for this purpose by including other important proxies of ex ante uncertainty, such as the use of IPO proceeds and risk factors that are disclosed in the prospectus to test whether the ex ante uncertainty hypothesis holds true in Malaysia.

Originality/value

This study fulfils the need for finding an appropriate theory that better explains IPO initial returns in the Asian IPO market by focussing exclusively on the pre-IPO information available in the prospectus. It also sheds light on important selected pre-listing information.

Details

Asian Review of Accounting, vol. 26 no. 1
Type: Research Article
ISSN: 1321-7348

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Book part
Publication date: 26 April 2011

Sean A.G. Gordon and James A. Conover

We investigate whether external investment banks or internal key IPO insiders such as company directors and officers, venture capitalists and institutions that hold an…

Abstract

We investigate whether external investment banks or internal key IPO insiders such as company directors and officers, venture capitalists and institutions that hold an IPO's stock serve as effective monitors of IPO investments over the post-IPO period. We measure median changes in each group's holdings for the sample, finding large changes in these values during a long-run holding period. We find that long-run buy-and-hold returns (BHARs) are positively related to the lead investment bank underwriter reputation and the gross spread demonstrating that the external monitoring by investment banking firms increases the post-IPO firm's value. Holding the underwriter reputation constant, we find that the BHARs are positively related to the gross spread, also indicative of the value of monitoring by external investment banks.

Details

Research in Finance
Type: Book
ISBN: 978-0-85724-541-0

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