Issuers increasingly appoint advisors in IPOs alongside underwriters. We find advisors in aggregate have no effect on first-day returns, withdrawals, or underwriting spreads in European IPOs. However, underpricing of IPOs with generalist advisors (who offer diverse services alongside IPOs) is significantly greater than with specialist IPO advisors and is at the expense of unsophisticated issuers. We link these findings to the different incentives of generalist and specialist advisors. Our results are consistent with naivety on the part of unsophisticated issuers, but more likely with unsophisticated issuers willingly paying for the reputational and other benefits of generalist advisors with IPO underpricing.
{"title":"Do advisors improve IPO outcomes?","authors":"Emmanuel Pezier, H. Jones","doi":"10.2139/ssrn.3400906","DOIUrl":"https://doi.org/10.2139/ssrn.3400906","url":null,"abstract":"Issuers increasingly appoint advisors in IPOs alongside underwriters. We find advisors in aggregate have no effect on first-day returns, withdrawals, or underwriting spreads in European IPOs. However, underpricing of IPOs with generalist advisors (who offer diverse services alongside IPOs) is significantly greater than with specialist IPO advisors and is at the expense of unsophisticated issuers. We link these findings to the different incentives of generalist and specialist advisors. Our results are consistent with naivety on the part of unsophisticated issuers, but more likely with unsophisticated issuers willingly paying for the reputational and other benefits of generalist advisors with IPO underpricing.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-01-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129687746","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Assets are reallocated less efficiently through mergers and acquisitions (M&As) between private firms compared to the public ones. I develop a theoretical framework to explain how information imperfections inhibit efficiency gains through private acquisitions. Two startups of different qualities are seeking initial public offerings (IPOs) for costly real options and can acquire each other before IPO. Investors initially cannot distinguish their qualities but can observe whether an acquisition occurred. I show that efficiency loss in private acquisitions is not generated by the quality of the acquirer, but rather due to a lower probability of completing deals. Furthermore, undertaking acquisitions before IPO generates a positive signal about firm quality during stock issuance. Lastly, I document empirical evidence in support of this signaling effect.
{"title":"The Race of Unicorns: A Signaling Story of Private Acquisitions","authors":"Xuelin Li","doi":"10.2139/ssrn.3195626","DOIUrl":"https://doi.org/10.2139/ssrn.3195626","url":null,"abstract":"Assets are reallocated less efficiently through mergers and acquisitions (M&As) between private firms compared to the public ones. I develop a theoretical framework to explain how information imperfections inhibit efficiency gains through private acquisitions. Two startups of different qualities are seeking initial public offerings (IPOs) for costly real options and can acquire each other before IPO. Investors initially cannot distinguish their qualities but can observe whether an acquisition occurred. I show that efficiency loss in private acquisitions is not generated by the quality of the acquirer, but rather due to a lower probability of completing deals. Furthermore, undertaking acquisitions before IPO generates a positive signal about firm quality during stock issuance. Lastly, I document empirical evidence in support of this signaling effect.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127130104","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using data from 1980 through 2005, and implementations of the Intertemporal Capital Asset Pricing Model (ICAPM), this study consistently generates positive intertemporal risk-return relations within venture capital markets. During the first five years of business, venture capitalists (VCs) are shown to be risk averse, and are characterized by a Coefficient of Relative Risk Aversion (CRRA) estimated at about 2.75. From the sixth year of business onwards, VCs are characterized by CRRAs that are no higher than 1.91. Combination of rigorous theoretical and empirical evidence establishes that CRRAs less than or equal to 2.00 are evidence for risk seeking preferences. The CRRA for the representative risk bearing agent who aggregates preferences of risk averse and risk seeking agents is shown to aggregate to 3.59. This outcome, to wit, a higher CRRA (3.59) for an agent who aggregates risk averse and risk seeking preferences, in relation to the CRRA for the embedded representative risk averse agent (2.75) is formally and theoretically shown to be outcome that subsists in equilibrium. Totality of the formal theoretical and empirical evidence demonstrates interpretations of CRRAs that are higher than 2.75 as evidence for stock markets that consist in entirety of risk averse agents is not robust.
{"title":"The Intertemporal Risk-Return Relation is Alive and Well, It's Interpretation? Not So Much","authors":"Oghenovo A. Obrimah","doi":"10.2139/ssrn.3438271","DOIUrl":"https://doi.org/10.2139/ssrn.3438271","url":null,"abstract":"Using data from 1980 through 2005, and implementations of the Intertemporal Capital Asset Pricing Model (ICAPM), this study consistently generates positive intertemporal risk-return relations within venture capital markets. During the first five years of business, venture capitalists (VCs) are shown to be risk averse, and are characterized by a Coefficient of Relative Risk Aversion (CRRA) estimated at about 2.75. From the sixth year of business onwards, VCs are characterized by CRRAs that are no higher than 1.91. Combination of rigorous theoretical and empirical evidence establishes that CRRAs less than or equal to 2.00 are evidence for risk seeking preferences. The CRRA for the representative risk bearing agent who aggregates preferences of risk averse and risk seeking agents is shown to aggregate to 3.59. This outcome, to wit, a higher CRRA (3.59) for an agent who aggregates risk averse and risk seeking preferences, in relation to the CRRA for the embedded representative risk averse agent (2.75) is formally and theoretically shown to be outcome that subsists in equilibrium. Totality of the formal theoretical and empirical evidence demonstrates interpretations of CRRAs that are higher than 2.75 as evidence for stock markets that consist in entirety of risk averse agents is not robust.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122093830","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Shares sold through Initial Public Offerings (IPOs) are often underpriced and therefore very popular investment objects. Fjesme (2016) documents that the allocating investment bank requires certain larger investors in popular IPOs to also purchase more shares after the stock exchange listing. This additional buying supports prices and attracts more attention to the companies in the short term. Wilhelm (1999) explains how non-professional investors are likely to misunderstand this price support as positive information and thereby increase their investment. Obtaining data to investigate the implications of price support on investor holdings has proven difficult in the past. In this paper, I investigate actual IPO allocations combined with trading after the listing on the Oslo Stock Exchange (OSE). I document that increased price support generates a large influx of domestic and retail ownership as opposed to foreign institutional ownership. I conclude that price support reduces international institutional ownership on the OSE.
{"title":"Initial Public Offering Price Support and Ownership Structures","authors":"Sturla Lyngnes Fjesme","doi":"10.2139/ssrn.3738450","DOIUrl":"https://doi.org/10.2139/ssrn.3738450","url":null,"abstract":"Shares sold through Initial Public Offerings (IPOs) are often underpriced and therefore very popular investment objects. Fjesme (2016) documents that the allocating investment bank requires certain larger investors in popular IPOs to also purchase more shares after the stock exchange listing. This additional buying supports prices and attracts more attention to the companies in the short term. Wilhelm (1999) explains how non-professional investors are likely to misunderstand this price support as positive information and thereby increase their investment. Obtaining data to investigate the implications of price support on investor holdings has proven difficult in the past. In this paper, I investigate actual IPO allocations combined with trading after the listing on the Oslo Stock Exchange (OSE). I document that increased price support generates a large influx of domestic and retail ownership as opposed to foreign institutional ownership. I conclude that price support reduces international institutional ownership on the OSE.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127253672","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using investor bidding data from 175 Chinese IPOs, we examine the effects of underwriters’ rent-seeking incentives. We find that Chinese IPO underwriters, with no discretion to allocate more shares to favored investors, instead favor mutual funds paying them greater brokerage commissions by discounting offer prices to make more orders from them eligible for IPO share allocations, which results in greater IPO underpricing. Further, underwriters choose price levels at which there are more bids from commission-paying mutual funds as offer prices. Rent seeking is more pronounced for underwriters who are top brokers and therefore place more weight on bidding investors’ interests.
{"title":"Rent Seeking, Brokerage Commissions, and Pricing and Share Allocation in Initial Public Offerings","authors":"Thomas J. Chemmanur, Bibo Liu, X. Tian","doi":"10.2139/ssrn.2954915","DOIUrl":"https://doi.org/10.2139/ssrn.2954915","url":null,"abstract":"Using investor bidding data from 175 Chinese IPOs, we examine the effects of underwriters’ rent-seeking incentives. We find that Chinese IPO underwriters, with no discretion to allocate more shares to favored investors, instead favor mutual funds paying them greater brokerage commissions by discounting offer prices to make more orders from them eligible for IPO share allocations, which results in greater IPO underpricing. Further, underwriters choose price levels at which there are more bids from commission-paying mutual funds as offer prices. Rent seeking is more pronounced for underwriters who are top brokers and therefore place more weight on bidding investors’ interests.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"28 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-10-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121402015","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Chun Chang, Yao-Min Chiang, Yiming Qian, J. Ritter
Studying the only mandatory pre-IPO market in the world—Taiwan’s Emerging Stock Market (ESM)—we document that pre-market prices are very informative about post-market prices and that informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before an initial public offering explains about 90% of the variation in the offer price-earnings ratio. However, the average IPO underpricing level remains high, at 55%, suggesting that agency problems between underwriters and issuers can lead to excessive underpricing, even with little valuation uncertainty. Also, regulations impact the relative bargaining power of players and therefore IPO pricing.Received June 4, 2014; accepted April 13, 2016 by Editor Andrew Karolyi.
{"title":"Pre-Market Trading and IPO Pricing","authors":"Chun Chang, Yao-Min Chiang, Yiming Qian, J. Ritter","doi":"10.2139/ssrn.2402806","DOIUrl":"https://doi.org/10.2139/ssrn.2402806","url":null,"abstract":"Studying the only mandatory pre-IPO market in the world—Taiwan’s Emerging Stock Market (ESM)—we document that pre-market prices are very informative about post-market prices and that informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before an initial public offering explains about 90% of the variation in the offer price-earnings ratio. However, the average IPO underpricing level remains high, at 55%, suggesting that agency problems between underwriters and issuers can lead to excessive underpricing, even with little valuation uncertainty. Also, regulations impact the relative bargaining power of players and therefore IPO pricing.Received June 4, 2014; accepted April 13, 2016 by Editor Andrew Karolyi.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115401113","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
E. Bajo, Thomas J. Chemmanur, K. Simonyan, H. Tehranian
Using various centrality measures from social network analysis, we analyze how the location of a lead initial public offering (IPO) underwriter in its network of investment banks affects various IPO characteristics. We hypothesize that investment banking networks allow lead IPO underwriters to induce institutions to pay attention to the firms they take public and to perform two information-related roles during the IPO process: an information dissemination role, in which the lead underwriter uses its investment banking network to disseminate noisy information about various aspects of the IPO firm to institutional investors; and an information extraction role, in which the lead underwriter uses its investment banking network to extract information useful in pricing the IPO firm equity from institutional investors. Based on these two roles, we develop testable hypotheses relating lead IPO underwriter centrality to the IPO characteristics of firms they take public. We find that more central lead IPO underwriters are associated with larger absolute values of offer price revisions, greater IPO and after-market valuations, larger IPO initial returns, greater institutional investor equity holdings and analyst coverage immediately post-IPO, greater stock liquidity post-IPO, and better long-run stock returns. Using a hand-collected data set of pre-IPO media coverage as a proxy for investor attention, we show that an important channel through which more central lead IPO underwriters achieve favorable IPO characteristics is by attracting greater investor attention to the IPOs underwritten by them.
{"title":"Underwriter Networks, Investor Attention, and Initial Public Offerings","authors":"E. Bajo, Thomas J. Chemmanur, K. Simonyan, H. Tehranian","doi":"10.2139/ssrn.2456237","DOIUrl":"https://doi.org/10.2139/ssrn.2456237","url":null,"abstract":"Using various centrality measures from social network analysis, we analyze how the location of a lead initial public offering (IPO) underwriter in its network of investment banks affects various IPO characteristics. We hypothesize that investment banking networks allow lead IPO underwriters to induce institutions to pay attention to the firms they take public and to perform two information-related roles during the IPO process: an information dissemination role, in which the lead underwriter uses its investment banking network to disseminate noisy information about various aspects of the IPO firm to institutional investors; and an information extraction role, in which the lead underwriter uses its investment banking network to extract information useful in pricing the IPO firm equity from institutional investors. Based on these two roles, we develop testable hypotheses relating lead IPO underwriter centrality to the IPO characteristics of firms they take public. We find that more central lead IPO underwriters are associated with larger absolute values of offer price revisions, greater IPO and after-market valuations, larger IPO initial returns, greater institutional investor equity holdings and analyst coverage immediately post-IPO, greater stock liquidity post-IPO, and better long-run stock returns. Using a hand-collected data set of pre-IPO media coverage as a proxy for investor attention, we show that an important channel through which more central lead IPO underwriters achieve favorable IPO characteristics is by attracting greater investor attention to the IPOs underwritten by them.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"170 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-12-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117277573","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In order-driven markets, orders can be strategically submitted at aggressive prices during the pre-opening phase and withdrawn just before trading commences. Based on a Kyle (1989) setting, we develop several predictions regarding how such "strategic" orders can temporarily distort price discovery despite their non-binding nature. Evidence from IPO firms, where market prices are determined for the first time, supports our predictions. Strategic orders are concentrated among firms with substantial valuation uncertainty and small investor presence. Their submission leads to significant changes in the indicative opening price that are not subsequently reversed by their withdrawal, but only in post-opening trading activity.
{"title":"Strategic Order Submission and Cancellation in Pre-Opening Periods: The Case of IPO Firms","authors":"Joseph Kuk, Wai-Man Liu, Peter K. Pham","doi":"10.2139/ssrn.1362484","DOIUrl":"https://doi.org/10.2139/ssrn.1362484","url":null,"abstract":"In order-driven markets, orders can be strategically submitted at aggressive prices during the pre-opening phase and withdrawn just before trading commences. Based on a Kyle (1989) setting, we develop several predictions regarding how such \"strategic\" orders can temporarily distort price discovery despite their non-binding nature. Evidence from IPO firms, where market prices are determined for the first time, supports our predictions. Strategic orders are concentrated among firms with substantial valuation uncertainty and small investor presence. Their submission leads to significant changes in the indicative opening price that are not subsequently reversed by their withdrawal, but only in post-opening trading activity.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"332 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115975908","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
John W. Cooney, Leonardo Madureira, A. Singh, Ke Yang
We examine the role of social ties in IPO underwriting syndicate formation and find that an investment bank is more likely to be included in the underwriting syndicate when it is connected to the IPO firm through interpersonal social ties between the respective executives and directors. These social ties generate better outcomes, consistent with a quid pro quo arrangement between the respective parties. The investment bank benefits by receiving higher compensation, a more senior role in the IPO, and greater share allocations. For the IPO firm, the presence of social ties between the IPO issuer and the chosen underwriters is associated with net wealth gains for its pre-IPO shareholders.
{"title":"Social Ties and IPO Outcomes","authors":"John W. Cooney, Leonardo Madureira, A. Singh, Ke Yang","doi":"10.2139/ssrn.2179491","DOIUrl":"https://doi.org/10.2139/ssrn.2179491","url":null,"abstract":"We examine the role of social ties in IPO underwriting syndicate formation and find that an investment bank is more likely to be included in the underwriting syndicate when it is connected to the IPO firm through interpersonal social ties between the respective executives and directors. These social ties generate better outcomes, consistent with a quid pro quo arrangement between the respective parties. The investment bank benefits by receiving higher compensation, a more senior role in the IPO, and greater share allocations. For the IPO firm, the presence of social ties between the IPO issuer and the chosen underwriters is associated with net wealth gains for its pre-IPO shareholders.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-05-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126169336","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Chitru S. Fernando, Vladimir A. Gatchev, A. May, W. Megginson
Clustering of IPO underwriting spreads at 7% poses two important puzzles: Is the market for U.S. equity underwriting services anti-competitive and why do equity underwriters invest in reputation-building? This study helps resolve both puzzles. Modeling endogeneity of firm-underwriter choice using a two-sided matching approach, we provide strong evidence of price and service differentiation based on underwriter reputation. High-reputation banks receive average reputational premia equaling 0.65% (0.47%) of average IPO (SEO) underwritten proceeds, which constitutes 10% (13%) of their underwriting spreads. Equity issuers working with high-reputation underwriters receive significant benefits, including higher offer values and lower percentage spreads net of reputational premia.
{"title":"Prestige without Purpose? Reputation, Differentiation, and Pricing in U.S. Equity Underwriting","authors":"Chitru S. Fernando, Vladimir A. Gatchev, A. May, W. Megginson","doi":"10.2139/ssrn.2334034","DOIUrl":"https://doi.org/10.2139/ssrn.2334034","url":null,"abstract":"Clustering of IPO underwriting spreads at 7% poses two important puzzles: Is the market for U.S. equity underwriting services anti-competitive and why do equity underwriters invest in reputation-building? This study helps resolve both puzzles. Modeling endogeneity of firm-underwriter choice using a two-sided matching approach, we provide strong evidence of price and service differentiation based on underwriter reputation. High-reputation banks receive average reputational premia equaling 0.65% (0.47%) of average IPO (SEO) underwritten proceeds, which constitutes 10% (13%) of their underwriting spreads. Equity issuers working with high-reputation underwriters receive significant benefits, including higher offer values and lower percentage spreads net of reputational premia.","PeriodicalId":445238,"journal":{"name":"ERPN: Initial Public Offerings (IPOs) (Sub-Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131810328","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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