IPO Characteristics and Analyst Forecasts (original) (raw)
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IPO Underpricing, Firm Quality, and Analyst Forecasts
Financial Management, 2007
We fi nd that IPO underpricing is positively related to post-IPO growth in sales and EBITDA, but is not signifi cantly related to growth in earnings. Our evidence suggests that accrual reversals or earnings management may cause this inconsistency. We interpret the growth rates of sales and EBITDA as measures of fi rm quality, and conclude that our evidence supports the notion that IPO fi rms with greater underpricing are of better quality. Our tests on analysts' earnings forecast errors show that analysts are less positively biased in their earnings forecasts for IPO fi rms that have greater underpricing.
Long-Term Mispricing and Analysts' Assessment on IPOs: Do Prior Unsuccessful Attempts Matter
2007
In this study we examine the underpricing of initial public offerings (IPOs) by firms that have private placements of equity before their IPOs (PP IPO firms). We find that PP IPOs are associated with significantly less underpricing than their peers. Furthermore, PP IPOs are associated with lower underwriting spreads, more reputable underwriting syndicates, and greater postissue analyst coverage as compared to IPOs that are issued by their industry peers under similar market conditions. Consistent with the implications of the information asymmetry explanation for IPO underpricing, our findings suggest that companies could benefit by conveying their quality via successful pre-IPO private placements that help reduce the cost of going public.
Impact of Investors Sentiment on Ipo Performance: Evidence from Nasdaq and Nyse
Journal of Business, Economics and Finance, 2022
Purpose-The paper explores the correlation between investors' sentiment, underpricing and performance over a period of 36 months of newly issued American stocks with a sample of 199 newly listed firms on NASDAQ and NYSE within the period of January 2015 to April 2021. IPOs listed on US stock exchanges have received little attention even though anomalies related to new stock issues are well documented. We aim to fill the existing academic gap. Methodology-We have hypothesized investor sentiment as the potential explaining variable inducing the anomalies observed and we extract this variable from the American Association of Individual Investors 1 survey results per the nearest date of each IPO issue. We compute the returns in two separate timeframes. The Market Adjusted Initial Returns (MAIRs) are computed as the price change observed during the offer day, adjusted to the S&P500 index. We investigate long-term performance by calculating the Buy-and-Hold Abnormal Return (BHARs) of each IPO for a period of 36months. The company characteristics, which are age, proceeds, number of issued shares, venture capital backing status and economic sector, are retrieved from Thomson Reuter's screens to control on IPO pricing. Then we use a regression model to see whether the predictor variable has an effect on the outcome variable. Findings-We found that the correlation between the bullish ratio and the MAIRs confirms results found in previous literature and no relationship between investor sentiment and long run performance have been observed. Conclusion-We conclude that on American stock markets, the existing underpricing can be explained by investors overreacting to new issues while findings relative to the long run performance contradict earlier research, as there is no evidence of underperformance among companies that went public between January 2015 and April 2021. Further research can be oriented toward understand why the documented poor performance related to IPOs no longer exists, as well as the particular characteristics of US markets which are favorable to the profitability of the new issues in the long-term.
Associations between management forecast accuracy and pricing of IPOs in Athens Stock Exchange
This study examines the forecast accuracy of newly listed companies on the Athens Stock Exchange and it continues by investigating earnings forecast with pricing of IPOs. It uses a unique data set of 208 IPOs, which were floated during the period of January 1994 to December 2001 in the Athens Stock Exchange. The findings derived show poor predictability errors regarding individual IPOs forecasts. In order to test companies’ specific characteristics and variations in accuracy, we conduct a multivariate regression analysis. The results suggest that investors are, able to anticipate forecast errors at the time of listings. Study on independent determinants that influence forecast accuracy show that three variables– age of the IPOs, ownership by insiders and industry classification – are significant determinants. Pricing of IPOs indicates that firms with negative earnings forecast (pessimistic) are associated with low level of underpricing while optimistic management earning forecast for an IPO can be a signal for high initial returns. Consistent to the results reported in the USA by Ljungqvist and Wilhelm (2003), and Loughran and Ritter (2008), this study highlights that on Greek Stock Exchange IPO underpricing increase in the late 1990s. It claims that such a trend can be estimated by two variables: (i) the optimistic forecast provided by issuers for the IPOs of that period, (ii) the high-growth of the market and the boom of technology firms. The results suggest that accurate forecasts are not rewarded with less money left on the table. Finally, it shows that size of the firm, leverage and economic conditions significantly affect market adjusted initial returns.
Strength of analyst coverage following IPOs
Journal of Financial Economics, 2006
Firms with poor aftermarket performance are given higher target prices and are more likely to receive strong buy recommendations, especially by analysts affiliated with the lead underwriter. This favorable coverage is relatively short lived, typically lasting less than six months. Controlling for the quantity of coverage received, stock prices of newly public firms increase more when the target price ratio is high and recommendation is a strong buy. These results suggest that when a firm goes public, underwriter-affiliated analysts provide protection in the form of ''booster shots'' of stronger coverage if the firm experiences poor aftermarket stock performance. r 2006 Published by Elsevier B.V. JEL classification: G14; G24
Presence of analyst before IPO and underpricing: a Meta-analysis
Applied Finance Letters
The effect of analyst presence on underpricing has shown a contrasting result. By synthesizing the result using meta-analysis for twelve studies with more than 20400 firms we found conclusive evidence of the relation between analyst presence and underpricing of IPOs. With the increase in analyst presence by 1% the IPO underpricing increases by 4.9%. Moreover, meta-regression between effect size and moderator variables found the significant and positive role of the reputed underwriter to increase underpricing when the IPO has coverage of analysts. Our results are striking for the US market IPOs in which reputed underwriters as moderator affect underpricing significantly and positively which shows reputation increase information asymmetry. Whereas in emerging markets IPOs reputed underwriters increase market efficiency and information symmetry.
Accuracy of Management Earnings Forecasts in IPO Prospectuses: Evidence from Athens Stock Exchange
Available at SSRN: http://ssrn. com/abstract, 2004
This study examines the earnings forecast accuracy of newly listed companies on the Athens Stock Exchange and further investigates the relationship between earnings forecast and pricing of IPOs. It uses a unique data set of 208 IPOs, which were floated during the period of January 1994 to December 2001 in the Athens Stock Exchange. The results suggest that investors are able to anticipate forecast errors at the time of listing. Pricing of IPOs indicate that firms with negative earnings forecast (pessimistic) are associated with low level of underpricing while optimistic management earning forecast can be a signal for high initial returns. Three variables -age of the IPOs, ownership by insiders and industry classification significantly contribute towards accuracy of earnings forecast.
Analyst Hype in IPOs: Explaining the Popularity of Bookbuilding
Review of Financial Studies, 2007
The bookbuilding IPO procedure has captured significant market share from auction alternatives recently, despite the significantly lower costs related to the auction mechanism. In France, where both mechanisms were used in the 1990s, the ostensible advantages of bookbuilding were advertising-related benefits. Book-built issues were more likely to be followed and positively recommended by lead underwriters. Even nonunderwriters' analysts promote book-built issues more in order to curry favor with the IPO underwriter for allocations of future deals. Yet we do not observe valuation or post-IPO return differentials that suggest these types of promotion have any value to the issuing firm. (JEL G24, G32) To observe the underwriting scandals that have come to light in the United States since the market crash of 2000, one might think that the bookbuilding mechanism used to price initial public offerings (IPOs) would have come under attack. The reality, however, both in the United States and globally, is surprisingly the opposite. In France, for example, where the market was roughly equally split in the 1990s between auctioned and book-built IPOs, auctions are now virtually extinct. In Japan, when bookbuilding was made available to issuers, IPO auctions quickly disappeared [Kaneko and Pettway (2003), Kutsuna This paper was previously titled ''Quid Pro Quo in IPOs: Why Book-building is Dominating Auctions.'' We thank
The Valuation of IPOs by Investment Banks and the Stock Market: Empirical Evidence
Social Science Research Network, 2002
In this paper, pre-IPO value estimations by the lead underwriting investment bank of Belgian IPO stocks are compared to the offer price and the stock price in the first month of listing. The valuation methods used by the lead underwriter and the estimated values are often discussed in Belgian IPO-prospectuses. For 33 IPOs in the 1993-2000 period, we find that in all cases the lead underwriter uses several methods to estimate stock value. Discounted free cash flow, which is used to price all IPOs in the sample, is the most popular valuation method. The IPO offer price is mainly driven by the dividend discount model if applied. However, we find that the dividend discount model is not better in predicting the stock price than other valuation models. Moreover, our results suggest that the dividend discount model tends to underestimate value, while discounted free cash flow produces unbiased results. This indicates that underwriters consciously underprice the IPO by relying on a valuation method that tends to underestimate value. We also find that price/earnings and price/cash flow multiples using forecasted earnings and cash flows for the year after the IPO lead to more accurate valuations than multiples using forecasted earnings and cash flows for the IPO-year. Finally, our results indicate that the offer price is closer to the stock price after listing than individual valuation estimates, although the differences are not statistically significant.
Management Science, 2009
IPO underpricing is endemic. Many theories have been developed to explain it. To inform theory and to investigate the practical application of prediction markets in an IPO setting, we conducted markets designed to forecast post-IPO valuations before a particularly unique IPO: Google. The combination of results from these markets and the unique features of the IPO help us distinguish between underpricing theories. The evidence leans against theories which require large payments to buyers to overcome problems of asymmetric information between issuers and buyers. It is most consistent with theories where underpricing is in exchange for future benefits. The prediction market results also show that it is possible to forecast post-IPO market values and, therefore, avoid losses associated with underpricing when a firm wishes to do so. JEL Classification Codes: C53, C93, G10, G14, G24, G32 Abstract IPO underpricing is endemic. Many theories have been developed to explain it. To inform theory and to investigate the practical application of prediction markets in an IPO setting, we conducted markets designed to forecast post-IPO valuations before a particularly unique IPO: Google. The combination of results from these markets and the unique features of the IPO help us distinguish between underpricing theories. The evidence leans against theories which require large payments to buyers to overcome problems of asymmetric information between issuers and buyers. It is most consistent with theories where underpricing is in exchange for future benefits. The prediction market results also show that it is possible to forecast post-IPO market values and, therefore, avoid losses associated with underpricing when a firm wishes to do so. JEL Classification Codes: C53, C93, G10, G14, G24, G32