Why Has IPO Underpricing Changed over Time

Allocation of Initial Public Offerings and Flipping Activity

We document a somewhat surprising regularity: of the many countries that have used IPO auctions, virtually all have abandoned them. The common explanations given for the lack of popularity of the auction method in the US, viz., issuer reluctance to try a new experimental method, and underwriter pressure towards methods that lead to higher fees, do not fit the evidence. We examine why auctions have failed and verify, to the extent possible, that they are consistent with what academic theory predicts. Both uniform price and discriminatory auctions are plagued by unexpectedly large fluctuations in the number of participants. The free rider problem and the winner's curse hamper price discovery and discourage investors from participating in auctions. Calculating the optimal bids in large multi-unit common value auctions with endogenous entry imposes a huge computational burden. With IPOs taking place sporadically, and each firm being different, auctions are likely to end up being unstable.

Why Do IPO Auctions Fail

This paper investigates the investment decision of IPO investors when equipped with information on both the quality of the firm and the market sentiment. The unique regulatory provisions allow IPO investors in India to have access to the independent assessment of firm quality and information on the participation of other investors, including institutional investors. At the same time, an active grey market reveals market sentiment before the application for subscription is closed. The results, which are robust to alternative model specifications, suggest that the institutional investors’ decision is guided almost exclusively by firm quality while the retail investors’ decision to participate in IPOs is strongly influenced by the market sentiment even in a highly transparent market where both sets of information are freely available.

/pdf/firm-quality-or-market-sentiment-what-matters-more-for-ipo-rpkozge6ne.pdf

Firm Quality or Market Sentiment: What Matters More for IPO Investors?

Share Retention, Underwriter Reputation, and Initial Public Offering Underpricing by Marcia Yvonne Reid-Grant MBA, Bernard M. Baruch College, City University of New York, 1992 BSc, University of the West Indies, 1989 Doctoral Study Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration Walden University December 2018 Abstract Initial public offering (IPO) underpricing is a costly practice that decreases the IPO proceeds accruing to the issuing firms and can derail a firm’s growth objectives. The purpose of this correlational study was to determine the relationship between share retention, underwriter reputation, and IPO underpricing among a population of IPOs issued in Jamaica. The efficient market hypothesis served as the theoretical framework for this study. Archived data for 52 IPOs issued in Jamaica from 1986 to 2018 were collected and Spearman’s correlation matrix and heteroscedasticity-consistent standard errors regression analysis were applied. The outcomes of this study indicated no significant relationship between share retention and IPO underpricing, α = .1 and α = .05, r = .059, p = .35; however, there was partial acceptance of the alternative hypothesis that underwriter reputation is related to IPO underpricing at α = .1, r = .234, p = .055, but not α = .05. Additionally, underpricing was higher for IPOs supported by the high reputation underwriters, and share retention was a slightly better predictor of IPO underpricing for this group of IPOs, R = .02, p = .31 versus R = .01, p = .75. Finally, the overall model indicated that the independent variables did not jointly explain IPO underpricing, F(2, 45) = .78, p = .455, R = .032. The results of this study might contribute to social change because successful IPOs can increase employment opportunities as well as improveInitial public offering (IPO) underpricing is a costly practice that decreases the IPO proceeds accruing to the issuing firms and can derail a firm’s growth objectives. The purpose of this correlational study was to determine the relationship between share retention, underwriter reputation, and IPO underpricing among a population of IPOs issued in Jamaica. The efficient market hypothesis served as the theoretical framework for this study. Archived data for 52 IPOs issued in Jamaica from 1986 to 2018 were collected and Spearman’s correlation matrix and heteroscedasticity-consistent standard errors regression analysis were applied. The outcomes of this study indicated no significant relationship between share retention and IPO underpricing, α = .1 and α = .05, r = .059, p = .35; however, there was partial acceptance of the alternative hypothesis that underwriter reputation is related to IPO underpricing at α = .1, r = .234, p = .055, but not α = .05. Additionally, underpricing was higher for IPOs supported by the high reputation underwriters, and share retention was a slightly better predictor of IPO underpricing for this group of IPOs, R = .02, p = .31 versus R = .01, p = .75. Finally, the overall model indicated that the independent variables did not jointly explain IPO underpricing, F(2, 45) = .78, p = .455, R = .032. The results of this study might contribute to social change because successful IPOs can increase employment opportunities as well as improve income distribution and socioeconomic indicators for the communities served by IPO firms. Share Retention, Underwriter Reputation, and Initial Public Offering Underpricing by Marcia Yvonne Reid-Grant MBA, Bernard M. Baruch College, City University of New York, 1992 BSc, University of the West Indies, 1989 Doctoral Study Submitted in Partial Fulfillment of the Requirements for the Degree of Doctor of Business Administration Walden University December 2018 Dedication To my son, Chadwyc Reed Grant, the person who sacrificed the most for me to achieve this milestone. Thanks Chad, you are indeed a precious gift from God. . Acknowledgments First I would like to thank God for his unfailing love, unfettered patience and loving kindness that I have experienced repeatedly along this DBA journey. I can unreservedly say I could not have made it without him. To my son Chad, thanks for forgiving me even when you did not understand the many times I had to postpone your activities to meet a DBA deadline. I know my new-found availability may appear strange to you, but I am looking forward to it. I would like to especially acknowledge the contribution of my committee chair and advisor, Dr. Thomas Schaefer whose guidance, expertise, and motivation were critical to this process. Dr. Schaefer’s hand-holding was indispensable, but I appreciate most of all his willingness to ask the difficult questions when I needed to be refocused and redirected. My sincere appreciation also to my committee member Dr. Deborah Nattress and my university research reviewer, Dr. William Stokes. Thanks for using your eye for details and immense knowledge to provide insightful comments, direction, and clarifications to this research project. I am also grateful to the managing director and her team at the Jamaica Stock Exchange for their role in the data collection process. To Doreen Forrester, who willingly allowed me to take over her house on the countless number of weekends when I needed to hide and write, thank you my friend. Finally, a special thanks to my family and circle of friends, whose loyalty, patience, spiritual support, and encouragement have been a beacon of light throughout my life and particularly for this project. Thank you all for your individual and combined contributions in making this study possible.

/pdf/share-retention-underwriter-reputation-and-initial-public-4w4iqvi89s.pdf

Share Retention, Underwriter Reputation, and Initial Public Offering Underpricing

Rock's [1] theory ascertains information asymmetry as a primary reason to answer 'Why New Issues are Underpriced?' Theoretical construct of this seminal work is based on information asymmetry between various classes of investors. Empirical manifestation of this theoretical explanation is based on considering different proxy measures to quantify the information asymmetry as perceived by various researchers over the past three decades. The growing IPO literature also explained underpricing with the help of agency theory, signaling, behavioural theories etc. Empirical research has identified various determinants of IPO underpricing. The influence of various factors predominantly depends upon country specific regulations, market microstructure and price discovery mechanism. Although many factors have justified the degree of underpricing, controlling for these factors does not completely eliminate the degree of under pricing. The justification of residual underpricing through these factors has limitations in terms of failure to completely explain the IPO underpricing. The paper reviews different factors presented in the extant literature that influence the price discovery mechanism of initial public offerings (IPO) in various economies. We conclude that the degree of underpricing is dynamic and various markets forces interact simultaneously in observing the variation in pricing the new equity issues. This paper points out the significance of regulatory framework in explaining the degree of IPO underpricing.

Underpricing of Initial Public Offerings: A Literature Review

Governance practices and agency cost in emerging market: Evidence from India

We evaluate the monitoring and certification hypotheses associated with venture capital (VC) investors involved with Indian listed firms having the potential to influence firm performance. Empirica...

Impact of Venture Capital Investment on Firm Performance: An Indian Evidence:

Private equity (PE) is one of the important sources of financing. The certification hypothesis associated with PE investment influences the performance during the process of going public. The listing day performance of initial public offerings (IPO) is significantly influenced by various financial intermediaries involved in the IPO process due to certification effect associated with their reputation. In this study we try to evaluate certification and grandstanding hypothesis associated with PE investors in IPO market. Our empirical results refute certification hypothesis since the PE investment does influence the IPO performance. However, the ownership stake of PE investment has negative impact on the first day of IPO performance. This supports grandstanding hypothesis where the ownership stake and the urge of PE investors in liquidating the stake determines the IPO performance. The insignificant ownership stake held by private equity investors is a consequence of regulatory constraint. The insignificant impact on long-term IPO performance is also due to insignificant ownership stake retained after IPO. In addition, it is also observed that business group affiliated firms have lower degree of IPO underpricing. The overall performance of IPO follows 'U' shape curve indicating positive performance in the short term and long-term.

Private equity investment, exit strategy and IPO performance: evidence from Indian IPOs

The performance of Indian initial public offerings (IPO) is influenced by the ownership structure of a firm. As many firms raise the capital in the form of private equity (PE), this work highlights the impact of governance structure of private equity firms, the decision of exit through IPO route on the performance of Indian IPO. In Indian scenario, private equity (PE) backed IPO shows insignificant role in impacting the degree of underpricing of IPO as well as IPO performance. The insignificant ownership stake held by private equity investors as a consequence of regulatory constraint as well as liquidating less ownership stake through IPO is identified as a differentiating characteristic in India. These observed results are contrary to the results reported by Lee & Wahal (2004). On the other hand it supports the grandstanding hypothesis related to private equity firms put forth by Gompers (1996). However, our results show that PE investment in business group affiliated firms’ shows significant negative impact on its long term performance. The overall performance of IPO follows ‘U’ shape curve.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1723050_code106283.pdf?abstractid=1718963&mirid=1&type=2

Supriya Katti

Papers

Underpricing of Initial Public Offerings: A Literature Review

Governance practices and agency cost in emerging market: Evidence from India

Impact of Venture Capital Investment on Firm Performance: An Indian Evidence:

Private equity investment, exit strategy and IPO performance: evidence from Indian IPOs

Role of Private Equity Exit Strategy, Governance Mechanism and Regulatory Constraint on Performance of Indian IPOs