Who Makes the Choice on IPO Underwriting Methods? Issuers vs. Underwriters (original) (raw)
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The choice between bookbuilding and fixed-price offering: Evidence from SEOs in Taiwan
Journal of International Financial Markets, Institutions and Money, 2011
As bookbuilding is less costly in terms of underpricing and has become the dominant underwriting method in initial public offerings (IPOs) (see Sherman, 2005), we examine whether the pattern still holds in seasoned equity offerings (SEOs) and find that only 15% (93 out of 610 sample firms) of SEO issuers in Taiwan selected the bookbuilding method. Among the fixed-price offerings, 84% of issuers would have had lower total issue costs in terms of the sum of gross spread and SEO underpricing, if the bookbuilding procedure was selected instead. It raises a question: Why do most SEO issuers in Taiwan prefer the costly fixed-price offer to the bookbuilding offer? Extending Barry (1989), we propose a measure of wealth loss to the existing shareholders to analyze this question. After considering the effect resulting from the pre-emption rights held by the existing shareholders, we find that the average wealth loss of fixed-price offerings is less than that of the bookbuilding offerings. That is, most SEO issuers are rational in choosing between the two underwriting mechanisms based on the expected wealth loss.
UNDERPRICING IN TURKEY: A COMPARISON OF THE IPO METHODS
This paper addresses the question of what kind of selling and underwriting procedure might be preferred for controlling the amount and volatility of underpricing in the Istanbul Stock Exchange (ISE). Using 1993-2005 firm and issue data, we compare the three substantially different IPO methods available in the ISE. One is very similar to the book building mechanism used in the U.S., another is the fixed price offer, and the third one is the sale through the stock exchange method. The empirical analysis reveals significant first day underpricing of 7.01% in fixed price offer, 11.47% in book building mechanism, and 15.68% in sale through the stock exchange method. Finally, we also show that fixed price offers can better control the impact of market information on underpricing than sale through the stock exchange method.
Review of Theoretical Explanations of IPO Underpricing
Journal of Accounting, Business and Finance Research, 2019
Motivated by a lack of availability of theoretical review of Initial Public Offerings (IPO) underpricing, this paper recognized a lack of presentation of theoretical explanations of the phenomenon of IPO underpricing in the literature. This makes scholars and investors interested in IPO underpricing research to face difficulty when it comes to the decision to employ IPO underpricing models. Hence, this paper provides a concise but comparatively adequate review of competing IPO underpricing theories. This review covered 13 theoretical models based on information asymmetry, institutional explanations, ownership and control reasons, and behavioral explanations to elucidate the phenomenon of IPO underpricing. Based on this review, the authors found that the underpricing phenomenon is eventually elucidated by the existence of information asymmetry amongst key IPO parties including the issuing firm, the underwriter, and the investor. Across the 13 reviewed IPO underpricing theories, the Entrepreneurial Wealth Losses (EWL) theory emerges as a compelling asymmetric information model. This is because it solves the problem of information asymmetry between the issuer and investor while accounting for the endogenous relationship between underwriter reputation and IPO underpricing.
Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs?
Review of Financial Studies, 2002
One of the puzzles regarding initial public offerings (IPOs) is that issuers rarely get upset about leaving substantial amounts of money on the table, defined as the number of shares sold times the difference between the first-day closing market price and the offer price. The average IPO leaves $9.1 million on the table. This number is approximately twice as large as the fees paid to investment bankers and represents a substantial indirect cost to the issuing firm. We present a prospect theory model that focuses on the covariance of the money left on the table and wealth changes. Our reasoning also provides an explanation for a second puzzling pattern: much more money is left on the table following recent market rises than after market falls. This results in an explanation of hot issue markets. We also offer a new explanation for why IPOs are underpriced.
Auctions versus book building of Japanese IPOs
Pacific-Basin Finance Journal, 2003
With the spread of U.S.-style book building, auctions have become less popular as IPO pricing mechanisms in the world. Does book building provide a better mechanism for issuing firms than auctions? Japan provides an interesting laboratory to compare investor-priced IPOs using pricecompetitive auctions with those of underwriter-priced IPOs using book building. Our analysis finds that, after controlling for ex ante uncertainty variables and other issue and company variables, the initial returns of book building IPOs are significantly higher than those of auctions, especially during hot markets. IPO firms ''left more money on the table'' using book building compared to auctions. D
The Rise of Accelerated Seasoned Equity Underwritings
Journal of Applied Corporate Finance, 2008
Seasoned equity offerings (SEOs) executed through accelerated underwritings have increased global market share recently, raising over 850billionsince1998,andnowaccountforoverhalf(two−thirds)ofthevalueofU.S.(European)SEOs.Weexamine31,242globalSEOs,executedduring1991−2004,whichraiseover850 billion since 1998, and now account for over half (two-thirds) of the value of U.S. (European) SEOs. We examine 31,242 global SEOs, executed during 1991-2004, which raise over 850billionsince1998,andnowaccountforoverhalf(two−thirds)ofthevalueofU.S.(European)SEOs.Weexamine31,242globalSEOs,executedduring1991−2004,whichraiseover2.9 trillion for firms and selling shareholders. Compared to fully marketed deals, accelerated offerings occur more rapidly, raise more money, and require fewer underwriters. Importantly, accelerated deals reduce total issuance cost by about 250 basis points. Accelerated deals sell equal fractions of primary and secondary shares, whereas in traditional SEOs primary shares dominate. Announcement period returns are comparable for traditional and accelerated offerings, while secondary and mixed offerings trigger more negative market responses than do primary offerings. We conclude that this rapid, worldwide shift towards accelerated underwriting creates a spot market for SEOs, and represents the long-predicted shift towards an auction model for seasoned equity sales.
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
Assets in Place, Growth Opportunities, and IPO Returns
Financial Management, 2005
We consider a simple model positing that initial public offering price is equal to the present value of an entity's assets in place and growth opportunities. The model predicts that initial return is positively related to both the size and risk of growth opportunities. Consistent with this prediction, we find initial return to be positively related to both the fraction of the offer price that is accounted for by the present value of growth opportunities and various proxies of issue uncertainty. We also find that IPO investors equate one dollar of growth opportunities to approximately three quarters of tangible assets.
Initial Public Offering Discount and Competition*
The Journal of Law and Economics, 2006
Lacking examples of initial public offering (IPO) mechanisms that are open to the public and priced competitively, previous studies could not determine what size discount, if any, is economically efficient. We compare two pricing regimes on the Tel Aviv Stock Exchange: an investor-driven Dutch auction limited by a binding maximum price replaced by one that is free of that constraint. Our evidence shows that rationing and herding disappear, improving the access of uninformed investors to strong issues and alleviating their exposure to losses attached to weak issues; pricing quality increases by the elimination of the underpricing bias, decreased price dispersion, and increased price sensitivity to IPO-unique factors. Underwriter services do not deteriorate but garner moderately higher fees, apparently to compensate for a higher risk. Consistently, there is no deterioration in IPO efficiency as a screen from weak issues. Our evidence does not support the view that underpricing is competitive or efficient. * Our co-author Harold Baker passed away in January 2001. For their questions and advice, we are indebted to
Stock market wealth-effects during privatization initial public offers in chile (1984-1989)
Estudios Gerenciales, 2010
The aftermarket performance of eleven privatization Initial Public Offers (IPOs) in Chile during 1984-1989 is studied in this document, and a detailed description of the economic and political conditions that prevailed is provided. In particular, we discuss the operational details of the stock issuing mechanism, complemented with a statistical study on the IPOs' Market Adjusted Returns. While the sample size is limited and does not support a significant external validity, the analysis confirms the presence of aftermarket performance patterns that are very similar to those observed in private and privatization IPOs reported elsewhere (