Can textual analysis solve the underpricing puzzle? A US REIT study

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Nino Martin Paulus ◽  
Marina Koelbl ◽  
Wolfgang Schaefers
Keyword(s):  
Initial Public Offering ◽  
Textual Analysis ◽  
Real Estate Investment Trust ◽  
Litigation Risk ◽  
Information Asymmetries ◽  
Qualitative Information ◽  
Ipo Underpricing ◽  
Content Type ◽  
Public Offering ◽  
Practical Implications

PurposeAlthough many theories aim to explain initial public offering (IPO) underpricing, initial-day returns of US Real Estate Investment Trust (REIT) IPOs remain a “puzzle”. The literature on REIT IPOs has focused on indirect quantitative proxies for information asymmetries between REITs and investors to determine IPO underpricing. This study, however, proposes textual analysis to exploit the qualitative information, revealed through one of the most important documents during the IPO process – Form S-11 – as a direct measure of information asymmetries.Design/methodology/approachThis study determines the level of uncertain language in the prospectus, as well as its similarity to recently filed registration statements, to assess whether textual features can solve the underpricing puzzle. It assumes that uncertain language makes it more difficult for potential investors to price the issue and thus increases underpricing. Furthermore, it is hypothesized that a higher similarity to previous filings indicates that the prospectus provides little useful information and thus does not resolve existing information asymmetries, leading to increased underpricing.FindingsContrary to expectations, this research does not find a statistically significant association between uncertain language in Form S-11 and initial-day returns. This result is interpreted as suggesting that uncertain language in the prospectus does not reflect the issuer's expectations about the company's future prospects, but rather is necessary because of forecasting difficulties and litigation risk. Analyzing disclosure similarity instead, this study finds a statistically and economically significant impact of qualitative information on initial-day returns. Thus, REIT managers may reduce underpricing by voluntarily providing more information to potential investors in Form S-11.Practical implicationsThe results demonstrate that textual analysis can in fact help to explain underpricing of US REIT IPOs, as qualitative information in Forms S-11 decreases information asymmetries between US REIT managers and investors, thus reducing underpricing. Consequently, REIT managers are incentivized to provide as much information as possible to reduce underpricing, while investors could use textual analysis to identify offerings that promise the highest returns.Originality/valueThis is the first study which applies textual analysis to corporate disclosures of US REITs in order to explain IPO underpricing.

An Empirical Investigation of IPO Underpricing and the Change to the LLP Organization of Audit Firms

2004 ◽  
Vol 23 (1) ◽  
pp. 53-67 ◽  
Author(s):  
Steven R. Muzatko ◽  
Karla M. Johnstone ◽  
Brian W. Mayhew ◽  
Larry E. Rittenberg
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Limited Liability ◽  
Litigation Risk ◽  
Ipo Underpricing ◽  
Audit Firm ◽  
Legal Structure ◽  
Audit Firms ◽  
Public Offering

This paper examines the relationship between the 1994 change in audit firm legal structure from general partnerships to limited liability partnerships (LLPs) on underpricing in the initial public offering (IPO) market. The change in legal structure of audit firms reduces an audit firm's wealth at risk from litigation damages and reduces the incentives for intrafirm monitoring by partners within an audit firm. Prior research suggests that underpricing protects underwriters from litigation damages, and that the level of underpricing varies inversely with both the amount of implicit insurance provided by the audit firm and the quality of the audit services provided. We hypothesize the change in audit firm legal structure reduced the assets available from audit firms in IPO-related litigation and indirectly reduced audit quality by lowering intrafirm monitoring. As a result, underwriters have incentives as a joint and several defendant with the audit firms to increase IPO underpricing, particularly for high-litigation-risk IPOs, following audit firms' shifts to LLP status. Our findings are consistent with this hypothesis.

IPO underpricing and long-term performance in China: the perspective of price limit policy

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yuxin Wang ◽  
Guanying Wang
Keyword(s):  
Initial Public Offering ◽  
Stock Exchange ◽  
Ipo Underpricing ◽  
Content Type ◽  
Price Limit ◽  
Good Policy ◽  
Public Offering ◽  
Long Term Performance ◽  
Term Performance

PurposeThe purpose of this paper is to explore how the price limit policy implemented in 2014 affects initial public offering (IPO) underpricing and long-term performance in China.Design/methodology/approachThe data are the IPOs from Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) between 2004 and 2018. The data are firstly divided into the IPOs before the price limit policy and the IPOs after the price limit policy according to the time of issuance. Then the two groups are divided into 4 subsamples according to the market blocks and the P/E ratio. The authors use multiple regression models to explore the effect of price limit policy in each subsample.FindingsThe first-day price limit system for IPOs is similar to the upward fuse mechanism, the purpose of which is to suppress IPO underpricing. However, this study finds that the policy does not suppress IPO underpricing, but increases the underpricing rate in all subsamples. Besides, the long-term performance in each subsample is different from each other. Main Board stocks’ long-term performance is worse after the policy. The policy makes Small and Medium Enterprise Board (SME Board) and Growth Enterprise Market Board (GEM Board) stocks with high P/E ratios perform better in the long term. For SME Board and GEM Board stocks with low P/E ratios, the policy makes no significant effect.Practical implicationsGood policy intentions may sometimes lead to counterproductive effects. However, since the long-term performance of each subsample is different, it is difficult to judge whether the policy should continue to be implemented or cancelled. Implementing different policies for different subsamples may be a better way to solve this problem.Originality/valueThis paper contributes to the study of IPO underpricing and long-term performance from the perspective of price limit policy.

scholarly journals A chronological review of the Australian litigation risk environment surrounding IPO earnings forecasts

2018 ◽  
Vol 30 (2) ◽  
pp. 168-186 ◽  
Author(s):  
Tracy C. Artiach ◽  
Gerry Gallery ◽  
Kimberley J. Pick
Keyword(s):  
Initial Public Offering ◽  
Historical Analysis ◽  
Earnings Forecasts ◽  
Institutional Setting ◽  
Regulatory Change ◽  
Litigation Risk ◽  
Risk Environment ◽  
Content Type ◽  
Public Offering ◽  
The Impact

Purpose This paper aims to provide a chronological review of changes in the institutional setting regulating Australian initial public offering (IPO) firms’ earnings forecasts over the period from 1994 to 2012. The changing forecasting environment covers both IPO firms’ prospectus earnings forecasts and post-listing updates to those forecasts. Design/methodology/approach This historical analysis reviews the changes in corporate regulation and enforcement, Australian Securities Exchange listing requirements and the outcomes of securities class actions (SCA) that affect IPO firms’ earnings forecasts. Findings A review of the institutional setting regulating Australian IPO firms’ earnings forecasts reveals two inter-temporal shifts in (increasing) litigation risk over 1994-2012 period which have arisen from more onerous regulations, stronger regulatory enforcement and a more active SCA market. The authors document the corporate responses to those shifts. Originality/value This is the first study to comprehensively document research of an inter-temporal litigation risk shift on IPO firms’ earnings forecasting behaviour. It therefore provides a formative base and a useful resource for researchers, practitioners and investigators (regulators, forensic accountants, etc.) when examining the impact of the changes on IPO firms’ forecasting behaviour following regulatory change and enforcement.

IPO overvaluation and returns prior to lockup expiration

2017 ◽  
Vol 43 (12) ◽  
pp. 1392-1410 ◽  
Author(s):  
K. Stephen Haggard ◽  
Yaoyi Xi
Keyword(s):  
Stock Returns ◽  
Initial Public Offering ◽  
Price Reduction ◽  
Content Type ◽  
Investment Portfolios ◽  
Public Offering ◽  
Lockup Expiration ◽  
The Impact ◽  
Practical Implications ◽  
Lockup Period

Purpose Conventional wisdom says that the price reduction stocks experience at expiration of the initial public offering (IPO) lockup period is due to relaxation of selling constraints. Findings from more recent literature question this explanation. The purpose of this paper is to examine a different cause for this price drop, IPO overvaluation. Design/methodology/approach Using the IPO overvaluation measures of Purnanandam and Swaminathan (2004), the authors examine IPO lockup period stock return differences between stocks in the highest and lowest overvaluation quintiles. Findings The authors show that the IPO lockup period price reduction is strongly related to overvaluation. Zero-investment portfolios long in the lowest overvaluation quintile and short in the highest overvaluation quintile of IPO firms have positive significant returns. Practical implications IPO investors can use the technique to identify firms likely to underperform in the IPO lockup period, potentially avoiding bad investments. Originality/value This is the first study to link IPO lockup period stock returns to IPO overvaluation, providing evidence on the impact of both overvaluation and short-selling constraints on stock returns in the IPO lockup period.

The impact of the reputation of underwriter and sponsoring representative on IPO underwriting fees

2016 ◽  
Vol 6 (4) ◽  
pp. 342-366 ◽  
Author(s):  
Chao Chen ◽  
Xinrong Wang
Keyword(s):  
Initial Public Offering ◽  
Political Connection ◽  
Content Type ◽  
Underwriting Fees ◽  
The One ◽  
Public Offering ◽  
The Impact ◽  
New Evidence ◽  
Practical Implications

Purpose The purpose of this paper is to analyze the effect of the reputation of underwriters and sponsoring representatives on initial public offering (IPO) underwriting fees, and further investigates the role of ownership and political connection. Design/methodology/approach The methodology includes three models. Model 1 empirically investigates the effect of underwriter’s reputation on underwriting fee. Model 2 studies the effect of sponsoring representative’s reputation on underwriting fee. Model 3 further examines the effect of underwriter’s reputation and sponsoring representative reputation on the underwriting fee controlling for the impact of ultimate controlling ownership and political connection. Findings The study documents that underwriters’ and sponsoring representatives’ reputation can result in reputational premiums. In the IPO of state-owned enterprises (SOEs), the reputation of underwriters and sponsoring representatives does not significantly affect the underwriting fees. In the IPO of non-state-owned enterprises (NSOEs), there is a significantly positive correlation between underwriters’ and sponsoring representatives’ reputation and underwriting fees. Further research results show that, on the one hand, the effect of underwriters’ and sponsoring representatives’ reputation on underwriting fees is not significant in the IPO of NSOEs with political connection. On the other hand, underwriting fees are positively associated with underwriters’ and sponsoring representatives’ reputation in the IPO of NSOEs without political connection. Research limitations/implications The sponsoring representative’s fee is not disclosed separately, which makes it difficult to distinguish the incremental effect from underwriter’s services and reputation. Practical implications NSOEs relative to SOEs are more likely to pay higher underwriting fees for hiring underwriter and sponsoring representative with better reputation during the process of IPO. Social implications The reputation of underwriter and sponsoring representative does not matter to SOEs but does matter to NSOEs. However, NSOEs’ political connection affects underwriter fees. Originality/value This paper provides new evidence of sponsoring representatives’ reputation and political connection on the underwriting fees in the IPO in Chinese SOEs and NSOEs.

Shariah-compliance and IPO underpricing: evidence from Pakistan Stock Exchange

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Waqas Mehmood ◽  
Rasidah Mohd-Rashid ◽  
Ahmad Hakimi Tajuddin ◽  
Hassan Mujtaba Nawaz Saleem
Keyword(s):  
Initial Public Offering ◽  
Stock Exchange ◽  
Negative Relationship ◽  
Ipo Underpricing ◽  
Content Type ◽  
Initial Return ◽  
Asset Volatility ◽  
Financial Characteristics ◽  
Public Offering ◽  
The Impact

Purpose This study aims to investigate the effect of Shariah-compliant status and Shariah regulation on initial public offering (IPO) underpricing in Pakistan. Design/methodology/approach Besides the ordinary least square’s method, this study used quantile least squares as a robust approach and stepwise regression for further analysis to investigate the underpricing phenomenon in Pakistan. Data of 84 IPOs listed on Pakistan Stock Exchange from January 2000 to December 2018 were collected to determine the impact of Shariah-compliant status and Shariah regulation on IPO underpricing. Findings Results of the study show that Shariah-compliant status has a negative relationship but Shariah regulation has a positive relationship with IPO underpricing. Hence, it is contended that Shariah-compliant firms have lower asset volatility and uncertainty than non-Shariah-compliant firms because of less information asymmetry, resulting in lower underpricing. These Shariah-compliant firms provide signals of high-quality IPOs as they must comply with the strict guidelines issued by the Securities Exchange Commission of Pakistan in addition to being considered as amicable by investors. Further, this study suggests that investors are more attracted to Shariah-compliant firms than non-Shariah-compliant ones. Research limitations/implications This study’s offers limited consideration of nonfinancial and financial characteristics that could influence the decision of investors to subscribe to IPOs. Besides, future studies could consider the screening benchmarks; for instance, debt and cash may explain the intensity of IPO initial return in Pakistan. Originality/value The present work empirically investigated the influence of Shariah-compliant status and Shariah regulation on IPO underpricing in Pakistan’s IPO market, which has been scarcely covered in the existing literature.

Rounding-up in reported income numbers

2014 ◽  
Vol 13 (2) ◽  
pp. 156-170 ◽  
Author(s):  
Rachappa Shette ◽  
Sudershan Kuntluru
Keyword(s):  
Initial Public Offering ◽  
Stock Exchange ◽  
Content Type ◽  
Market Capitalization ◽  
Earnings Per Share ◽  
Unusual Occurrence ◽  
Public Offering ◽  
Reported Earnings ◽  
Practical Implications ◽  
Reported Income

Purpose – This paper aims to investigate the rounding-up in reported income numbers of Indian companies by examining the evidence of unusual occurrence of zero and nine in reported income numbers such as profit after tax and earnings per share (EPS). It also examines such rounding-up patterns under different scenarios such as companies varying across different time periods, income size, market capitalization, industries, initial public offering and earnings news. Design/methodology/approach – All 1,707 companies listed on National Stock Exchange of India were considered for analysis. This study covered a period of 21 years from 1991-1992 to 2011-2012. Data were collected from PROWESS database. Findings – In Indian companies, the rounding-up pattern in reported income numbers is in conformity with existing studies (Carslaw, 1988; Thomas, 1989). In case of income numbers, the observed proportionate occurrence of zero and nine is significantly different from the expected proportionate occurrence. The study found that anomalies in reported earnings vary across industry. Further, it is found that the per cent deviations are more in case of companies having high income levels, high market capitalization and with positive news. Research limitations/implications – In future studies, it will be interesting to develop a model reflecting the causes for such rounding-up of income numbers. Practical implications – The paper provides an insight analysis on the rounding-up behavior of Indian companies and facilitates the understanding of occurrence of such anomalies under various scenarios. This paper may be useful to all the users of accounting information. Originality/value – First study on examining the rounding-up of reported income numbers and EPS by companies in India.

How accurate are A-REIT IPO dividend forecasts?

2019 ◽  
Vol 38 (1) ◽  
pp. 47-55 ◽  
Author(s):  
Bill Dimovski ◽  
Rebecca Ratcliffe ◽  
Christopher Ratcliffe ◽  
Monica Keneley ◽  
Scott Salzman
Keyword(s):  
Initial Public Offering ◽  
Forecast Errors ◽  
Forecast Period ◽  
Content Type ◽  
Retail Investors ◽  
Investment Opportunities ◽  
Regression Approach ◽  
Public Offering ◽  
Practical Implications ◽  
Industrial Company

Purpose The purpose of this paper is to investigate the accuracy of Australian Real Estate Investment Trust (A-REIT) initial public offering (IPO) dividend forecasts between 1994 and 2016. Design/methodology/approach This study compares the dividend forecasts of A-REIT IPOs for the first dividend forecast period in the prospectus, with the actual dividend declared for that forecast period. As well as simple descriptive summary measures, this study also employs an exact logistic regression approach to examine the factors that might influence the IPOs achieving or exceeding the dividend forecast. Findings The study identifies that the dividends declared, on average, were greater than the dividend forecast and that more than nine out of ten of the IPOs listed after 1999 achieved or exceeded their prospectus forecast. In addition the authors observe positive mean forecast errors, suggesting dividend forecasts in A-REIT IPOs, are cautiously biased. This is in contrast to the industrial company data reported in Brown et al. (2000) which suggest dividend forecasts are optimistically biased. The study also finds the A-REIT IPOs that did not forecast a dividend, generally did not pay a dividend. Practical implications The results will inform dividend seeking institutional and retail investors of the investment opportunities in A-REIT IPOs. Originality/value This paper adds to the discussion of the relative predictability of dividends of A-REIT IPOs compared to industrial company IPOs.

IPO activity and market volatility

2018 ◽  
Vol 7 (1) ◽  
pp. 2-13 ◽  
Author(s):  
Mehmet F. Dicle ◽  
John Levendis
Keyword(s):  
Initial Public Offering ◽  
Realized Volatility ◽  
Market Volatility ◽  
Content Type ◽  
The Public ◽  
Regulatory Policies ◽  
Opportune Time ◽  
Public Offering ◽  
Practical Implications ◽  
Policy Prescription

Purpose The purpose of this paper is to hypothesize two channels in which market volatility affects initial public offering (IPO) activity. Design/methodology/approach First, CEOs time the market for IPOs and volatility makes this decision process harder. Second, risk-averse IPO investors become more reluctant toward IPOs during periods of higher volatility for their after-IPO returns. Findings The authors provide evidence that higher market volatility leads to lower IPO activity, supporting these hypotheses. More importantly, the authors show that it is not the realized volatility, but rather the implied (expected) volatility, that causes lower IPO activity. Research limitations/implications While there may be many companies that are ready to have IPOs, they may be simply waiting for a more opportune time which may not necessarily be a period of high prices but of low volatility. Practical implications The public policy prescription is clear: if IPOs are to be encouraged, then regulatory policies should be constructed with the aim of reducing volatility. Originality/value This study is the first (to the authors’ knowledge) to argue that it is not the realized volatility which most affects the IPO decisions of executives, entrepreneurs and investors.

scholarly journals Corporate governance and IPO underpricing: evidence from the italian market

2021 ◽  
Author(s):  
Emanuele Teti ◽  
Ilaria Montefusco
Keyword(s):  
Corporate Governance ◽  
Initial Public Offering ◽  
Boards Of Directors ◽  
Stock Option ◽  
Board Members ◽  
Ipo Underpricing ◽  
Italian Market ◽  
Public Offering ◽  
The Impact ◽  
Positive Effect

AbstractThis paper aims to analyse the impact of firms’ corporate governance characteristics on the degree of first-day returns (i.e., underpricing) in the Italian initial public offering (IPO) market. In particular, this work investigates the impacts of the characteristics of boards of directors (BoDs) and ownership structure on the underpricing of newly offered shares. By studying a sample of 128 Italian IPOs between 2000 and 2016, it is concluded that corporate governance characteristics affect the degree of first-day returns following a company’s IPO. More specifically, the size of the BoD negatively affects underpricing, while the ownership of institutional investors and board members has a positive effect on the degree of underpricing. Conversely, no significant evidence is found with regard to board independence, the number of female directors in the boardroom, the implementation of stock option plans and ownership concentration.

Sign in / Sign up

Export Citation Format

Share Document