Self-Underwritten IPOs: An Analysis of Underpricing and Market Liquidity (original) (raw)
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When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket
The Journal of Finance, 2000
This paper examines aftermarket trading of underwriters and unaffiliated market makers in the three month period after an IPO. We find that the lead underwriter is always the dominant market maker, he takes substantial inventory positions in the aftermarket trading, and co-managers play a negligible role in aftermarket trading. The lead underwriter engages in stabilization activity for less successful IPOs, and uses the overallotment option to reduce his inventory risk. Compensation to the underwriter arises primarily from fees, but aftermarket trading does generate positive profits, which are positively related to the degree of underpricing.
IPO Underpricing and After-Market Liquidity
Review of Financial Studies, 2006
The underpricing of initial public offerings (IPOs) is generally explained with asymmetric information and risk. We complement these traditional explanations with a new theory where investors worry also about the after-market illiquidity that may result from asymmetric information after the IPO. The less liquid the aftermarket is expected to be, and the less predictable its liquidity, the larger will be the IPO underpricing. Our model blends such liquidity concerns with adverse selection and risk as motives for underpricing. The model's predictions are supported by evidence for 337 British IPOs effected between 1998 and 2000. Using various measures of liquidity, we find that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing.
AN OVERVIEW OF UNDERPRICING OF INITIAL PUBLIC OFFERINGS
isara solutions, 2020
IPO Introduction The idea of a firm's going public and profitability plays the most important role in investment decisions in the field of finance. Consequently, any firm's goal is to retain its core activities and to keep stakeholders successful over time (specifically to shareholders). A growing company requires capital to invest, and it can be created from different sources like the equity, external equity, debt or other types. In addition to shareholders' capital and income, companies typically raise money out of the market by various means, including private sector investment, venture capital, loan and the issuance of debt. Traditional financial sources (owners' equity, debt and retained earnings) are often insufficient to fund an organization because of fast growth or rising costs. Rock (1986) claimed that one of the key reasons for companies behind the public is their risk aversion because risk is only shared by publicly traded companies' owners and financers. One effective way to collect funds is therefore to proceed with initial public offering (IPO). In order to invest in a business, IPOs are most widely used to raise capital from the public to support a new venture and disseminate ownership through securities. Loughran et al (1994) have found three different mechanisms in each country: fixed price deals, books building method, and auctions. Sherman (2005) indicated that book building was a better method than auctioning and therefore less expensive as the underwriter ensured that a minimum of informed investors participated. UNDERPRICING OF IPO The IPO underpricing, simply is, when the listing price is higher, the difference between the closing offer price of an inventory (through IPO) and the closing price of an inventory at the first (listing) day of trade. It gives investors a short-term chance for investment, of course. Therefore, the huge rush of firms into stock exchange listing and IPO fund-generating is marked with an enormous queue of investors awaiting IPO allotments, regulatory framework creation and primary-market investment banking expansion. These specific features have made IPO an interesting financial study case. A business announces the IPO or the offer to issue new equities in the market by presenting information on the company's history, its previous financial results, its purposes and the expectations for the future along with the risk. This risk may be an investment in risky ventures or the non-allocation of shares as a result of oversubscription, and such risks must in some way be covered. It was shown that the majority of IPOs are traded on the listing day at a higher price. The company is now facing a lack of opportunity and could raise more capital by charging higher rates, which it did not actually. It seems that investors vary from other people regarding the company's potential prospects: The company was unfairly priced and deserves a better price. The greater the price, the larger the revenue the organization will produce from the higher price bid, but businesses have lost the money. This incidence is labelled by issuers as "money left on the table" (Pande and Vaidyanathan, 2009).
We analyse a sample of 129 Initial Public Offerings (IPOs) on the Italian Stock Exchange from January 2001 to December 2012. Results confirm the presence of underpricing in two thirds of the sample offerings but with an average level of 6.75% that is far below previous studies. Moreover we provide detailed temporal insights to show that the phenomenon is timevarying, albeit our sample does not show a positive correlation with hot market periods only. The average stock performance 30 days after the listing is lower than average first day return, evidence that is mainly explained by temporary actions of price support by underwriters. Finally, through a series of multivariate regression analyses we find that various factors exercise an influence on the IPO underpricing level, specifically: firm size, aftermarket risk, market demand, financial crisis and shares retention by existing shareholders.
Underpricing, share retention, and the IPO aftermarket liquidity
International Journal of Managerial Finance, 2005
Underpricing, share retention, and the IPO aftermarket liquidity Research paper Purpose To test the effects of underpricing and share retention (i.e., the proportion of shares retained by the pre-IPO owners) on IPO aftermarket liquidity. Design/methodology/approach We use 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. We conduct both non-parametric analyses and multiple regressions to investigate the effects of underpricing and share retention on liquidity. Findings Our 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. We also find 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 (1996) liquidity theory. In addition, this is one of the first empirical studies to analyze the effect of share retention on aftermarket liquidity.
What determines IPO underpricing ? Evidence from a frontier market
2009
This paper empirically analyzes the short run performance of Tunisian initial public offerings (IPO). It sheds light on the determinants of IPO's in a context of a frontier market characterized by high information asymmetry, low information efficiency, thin trading and the presence of "noise" traders. Using a sample of 34 Tunisian IPO's from the period 1992-2008, we find that the average market adjusted initial return for the first three trading days is about 17.8 percent. The level of underpricing is related to retained capital, underwriter's price support, oversubscription, listing delay and the offer price. Age of the firm, its size and the size of the offer do not seem to reduce the amount of money left on the table by issuers. It appears also that underpricing is driven by irrational investors (ipoers) seeking for short-run capital gains. These results remain unchanged after controlling for the presence of institutional investors and the existence of liquidity contract.
The Underpricing of Venture and Nonventure Capital IPOs: An Empirical Investigation
Journal of Financial Services Research, 2001
In this paper, we examine the premarket underpricing phenomenon within a group of venture-backed and a group of non-venture-backed initial public offerings (IPOs), using a stochastic frontier approach. Consistent with previous research, we find that venture-backed IPOs are managed by more reputable underwriters and generally are associated with less underwriter compensation. However, unlike other papers in the literature, we find that the initial-day returns of venture-backed IPOs on average, are, higher than the non-venture-backed group. We observe a significantly higher degree of premarket pricing inefficiency in the initial offer price of venture-backed IPOs. Further, our results show that a significant portion of the initial day returns is due to deliberate underpricing in the premarket.
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.