THE FUNDAMENTAL THEOREMS OF ASSET PRICING AND THE CLOSED-END FUND PUZZLE

2019 ◽  
Vol 22 (05) ◽  
pp. 1950025
Author(s):  
GABRIEL FRAHM ◽  
ALEXANDER JONEN ◽  
RAINER SCHÜSSLER
Keyword(s):  
Financial Markets ◽  
Initial Public Offering ◽  
Dominant Strategy ◽  
Fund Manager ◽  
Cross Sectional ◽  
Arbitrage Opportunity ◽  
Public Offering ◽  
Abnormal Profits ◽  
Fundamental Theorems ◽  
To Receive

We propose a solution to the closed-end fund puzzle in financial markets without a free lunch with vanishing risk. Our results are consistent with both the time-series and the cross-sectional aspect of the closed-end fund puzzle. It turns out that a closed-end fund cannot exist if the fund manager is supposed to receive a fee although he is not able to find mispriced assets in the market. By contrast, a premium can typically be observed at the initial public offering because the fund manager has access to information that enables him to create a dominant strategy. As soon as this weak arbitrage opportunity evaporates, a premium can no longer occur. The reason why a premium quickly turns into a discount might be that the fund manager stops applying a superior trading strategy at some point in time. Another possibility is that abnormal profits are transient in a competitive financial market. In any case, when the fund manager is no longer willing or able to maintain a superior strategy, the fund must trade at a discount in order to compensate for his management fee.

scholarly journals Struktur Corporate Governance, Reputasi Underwriter Dan Initial Public Offering (Ipo) Underpricing Di Indonesia

2019 ◽  
Vol 8 (1) ◽  
Author(s):  
Purwanto Purwanto ◽  
Bambang Nur Cahyaningrum
Keyword(s):  
Corporate Governance ◽  
Initial Public Offering ◽  
Cross Sectional Study ◽  
Sectional Study ◽  
Ipo Underpricing ◽  
Cross Sectional ◽  
Purposive Sampling ◽  
Public Offering

Penelitian ini bertujuan untuk mengkaji apakah struktur corporate governance perusahaan dan reputasi underwriter mempengaruhi IPO underpricing perusahaan yang go public dengan menggunakan periode tahun 2010-2016. Penelitian ini menitikberatkan pada pengaruh reputasi underwriter dan struktur corporate governance yaitu komposisi dewan komisaris independen, komite audit dan dewan direksi. Penelitian ini merupakan penelitian ekspost facto dengan menggunakan dimensi waktu cross sectional study. Populasi yang digunakan dalam penelitian ini adalah seluruh perusahaan yang melakukan Initial Public Offering (IPO) di Bursa Efek Indonesia (BEI) selama periode 2010-2016. Jumlah sampel dalam penelitian ini adalah 117 perusahaan. Teknik pengambilan sampel yang digunakan adalah purposive sampling. Hasil penelitian ini menunjukkan bahwa reputasi underwriter dan dewan direksi berpengaruh signifikan terhadap IPO Underpricing di Indonesia.

Does prospectus information matter in IPO pricing?

2018 ◽  
Vol 9 (4) ◽  
pp. 514-530 ◽  
Author(s):  
Rasidah Mohd-Rashid ◽  
Mansur Masih ◽  
Ruzita Abdul-Rahim ◽  
Norliza Che-Yahya
Keyword(s):  
Initial Public Offering ◽  
Institutional Investors ◽  
Ordinary Least Squares ◽  
Quadratic Model ◽  
Cross Sectional ◽  
Content Type ◽  
Ipo Pricing ◽  
The Government ◽  
Public Offering ◽  
Lower Uncertainty

Purpose The purpose of this study is to identify selected information from the prospectus that might signal the initial public offering (IPO) offer price. Design/methodology/approach This study uses cross-sectional data for a 14-year period from 2000 to 2014 in examining hypotheses relating to Shariah-compliant status, institutional investors, underwriter ranking and shareholder retention, with respect to their associations with the offer price of the IPOs. Further, this study uses ordinary least squares (OLS) for all models, including the models for both subsamples of Shariah- and non-Shariah-compliant IPOs. As for robustness, this study incorporates the quantile regression and quadratic model. Findings The results tend to provide support for the argument that firms with Shariah-compliant status reflect lower uncertainty and project better signalling of quality due to greater scrutiny by the government and thus are able to offer IPOs at higher prices. Similarly, firms with a higher proportion of shareholder retention indicate lower risks as insiders forego their options to diversify their portfolio, and hence could price their IPOs higher. Finally, the involvement of institutional investors and higher underwriter ranking could be used by firms to disregard information asymmetry, and therefore, the issuer might have to discount the IPO offer price. Research limitations/implications This study focuses solely on information in the prospectus that should not be disregarded by the investors in valuing the appropriateness of the IPO offer price. This study contributes in terms of providing a better understanding of the determinant factors of the IPO offer price of the firms which are Shariah-compliant. Originality/value This paper provides evidence for the determinants of the IPO offer price in a fixed pricing mechanism for both Shariah-and non-Shariah-compliant IPOs.

Relationship between prestige signals and over-subscription ratio

2019 ◽  
Vol 15 (4) ◽  
pp. 564-579 ◽  
Author(s):  
Ali Albada ◽  
Othman Yong ◽  
Soo-Wah Low
Keyword(s):  
Initial Public Offering ◽  
Design Methodology ◽  
Executive Board ◽  
Cross Sectional ◽  
Content Type ◽  
Underwriter Reputation ◽  
Reputational Capital ◽  
Public Offering ◽  
The Relationship ◽  
Institutional Participation

PurposeThe purpose of this paper is to examine whether initial public offering (IPO) over-subscription is a function of firm’s prestige signals conveyed by third parties with reputational capital such as underwriter, auditor and independent non-executive board member.Design/methodology/approachThe relationship between prestige signals and over-subscription ratio (OSR) of IPOs is analysed using a cross-sectional regression based on a sample of 393 IPOs issued between January 2000 and December 2015.FindingsThe results indicate that IPOs underwritten by reputable underwriters have lower OSR than those underwritten by non-reputable underwriters. While issuer engages reputable underwriter to certify firm quality to reduce information asymmetry, the action brings with it lower initial returns for its IPO. Investors interpret the signal conveyed by issuer’s choice of underwriter from under-pricing perspective and respond accordingly by reducing IPO demand. This implies that investors regard under-pricing as a more valuable signal than firm quality signal associated with underwriter reputation. The findings also indicate that over-subscription increases in IPOs that have above average initial returns and higher institutional participation. Issuing firms that go public in a period of high IPO volume are associated with low OSR.Originality/valueThis is the first paper to examine the relationship between the prestige signals and OSR of IPOs in the Malaysian context.

scholarly journals Does Leverage Constrain Real and AEM Around IPO Corporate Event? Evidence from the Emerging Market

2019 ◽  
Vol 20 (2) ◽  
pp. 354-367
Author(s):  
Sani Hussaini Kalgo ◽  
Bany-Ariffin A.N. ◽  
Hairul Suhaimi Bin Nahar ◽  
Bolaji Tunde Matemilola
Keyword(s):  
Earnings Management ◽  
Initial Public Offering ◽  
Emerging Market ◽  
Order Theory ◽  
Agency Cost ◽  
Free Cash Flow ◽  
Cross Sectional ◽  
Pecking Order Theory ◽  
Public Offering ◽  
The Impact

The article investigates whether Malaysian initial public offering (IPO) firms engage in real and accrual earnings management (AEM) and examines the impact of leverage on the earnings management’s discretionary behaviour of the firms for the period of 2003–2013. The Dechow, Sloan, and Sweeney (1995, The Accounting Review, 70[2], 193–225) cross-sectional modified Jones model was used to estimate discretionary accruals, while Roychowdhury’s (2006, Journal of Accounting and Economics, 42[3]), 335–370) cross-sectional models were used to investigate abnormal real activity discretionary behaviour. The results indicate Malaysian IPO firms engage in real and accrual discretionary behaviour. The graphical presentations of the earnings’ management proxies indicate higher real and AEM for high-leverage firms. Similarly, the multivariate analysis indicates a positive relationship between leverage and earnings management, which is in tandem with the agency cost of free cash flow theory and debt hypothesis. It is also consistent with the pecking-order theory of capital structure. This study suggests that regulatory agencies and standard setters should continue to improve quality of accounting reports in order to protect investors’ invested capital.

scholarly journals Institutional characteristics, signaling variables and IPO initial returns

2019 ◽  
Vol 3 (1) ◽  
pp. 29-49 ◽  
Author(s):  
Sheela Devi D. Sundarasen
Keyword(s):  
Initial Public Offering ◽  
Firm Value ◽  
Civil Law ◽  
Oecd Countries ◽  
Legal Framework ◽  
Least Square ◽  
Institutional Characteristics ◽  
Cross Sectional ◽  
Content Type ◽  
Public Offering

Purpose This paper aims to provide empirical evidence on the extent of alteration institutional characteristics, i.e. legal origin and corruption levels, may have on the signaling effects of auditors’ reputation, underwriters’ reputation and ownership retention on initial public offering (IPO) initial returns in OECD countries. Design/methodology/approach Cross-sectional data composed of 6,182 IPOs from 30 OECD countries are used for 2003-2012. Ordinary least square with multiple linear regressions is used to test the hypotheses. Findings The findings indicate that the legal framework and corruption level of a country alters the signaling effects of underwriters’ reputation, auditors’ reputation and ownership retention in an IPO environment. These three variables mitigate information asymmetry, signal firm value to potential investors and ultimately decrease IPO initial returns. This relationship is more significant in the civil law countries. Corruption levels negatively moderate the relationship in the common law and Scandinavian civil law countries but have no significance in the German and French civil law countries, indicating the importance of the signaling variables in these two civil law countries. Originality/value This study examines the extent of the alterations that the legal framework and the corruption levels cause to the signaling relationship between auditors’ reputation, underwriters’ reputation and ownership retention on IPO initial returns in selected OECD countries.

R&D investment decisions of IPO firms and long-term future performance

2018 ◽  
Vol 17 (1) ◽  
pp. 78-108 ◽  
Author(s):  
Tatiana Fedyk ◽  
Natalya Khimich
Keyword(s):  
Stock Returns ◽  
Initial Public Offering ◽  
Investment Decision ◽  
Investment Decisions ◽  
Poor Performance ◽  
Net Income ◽  
Cross Sectional ◽  
Content Type ◽  
Public Offering ◽  
D Investment

Purpose The purpose of this paper is to link valuation of different accounting items to research and development (R&D) investment decisions and investigate how suboptimal R&D choices during initial public offering (IPO) are linked to future operating and market underperformance. Design/methodology/approach For firms with substantial growth opportunities, accounting net income is a poor measure of the firm’s performance (Smith and Watts, 1992). Therefore, other metrics such as R&D intensity are used by investors to evaluate firms’ performance. This leads to a coexistence of two strategies: if earnings are the main value driver, firms tend to underinvest in R&D; and if R&D expenditures are the main value driver, firms tend to overinvest in R&D. Findings The authors show that the R&D investment decision varies systematically with cross-sectional characteristics: firms that are at the growth stage, unprofitable or belong to science-driven industries are more likely to overinvest, while firms that are able to avoid losses by decreasing R&D expenditure are more likely to underinvest. Finally, they find that R&D overinvestment leads to future underperformance as evidenced by poor operating return on assets, lower product market share, higher frequency of delisting due to poor performance and negative abnormal stock returns. Originality/value While prior literature concentrates on R&D underinvestment as a tool of reporting higher net income, the authors demonstrate the existence of an alternative strategy used by many IPO firms – R&D overinvestment.

scholarly journals Determinants of performance of privatized firms: The role of the economy, competition, restructurings financial markets, corporate ownership and governance

2011 ◽  
Vol 1 (4) ◽  
pp. 39-64 ◽  
Author(s):  
José Manuel Bernardo Vaz Ferreira
Keyword(s):  
Financial Markets ◽  
Initial Public Offering ◽  
Stock Exchange ◽  
Economic Conditions ◽  
Corporate Ownership ◽  
Performance Improvements ◽  
Privatized Firms ◽  
Public Offering ◽  
Performance Behavior

The aim of this work is to investigate the determinants and why and how the post-privatization firm’s performance improvements occur in an application to the Portuguese case. We test the effects of some causes that may have effects on that performance behavior, based on the agency, property rights and public choice theories. We conclude that the privatization itself, the simple act of privatizing a firm, leads to performance improvements, independently of the effect of other determinants. We observe the same effect when there are favourable economic conditions, when they are in a competitive market, when companies are listed in a stock exchange after privatization, when they are privatized by an initial public offering and when companies develop restructurings before privatization.

scholarly journals The Efficient IPO Market Hypothesis: Theory and Evidence

2020 ◽  
Vol 55 (7) ◽  
pp. 2304-2333
Author(s):  
Kevin R. James ◽  
Marcela Valenzuela
Keyword(s):  
Time Series ◽  
Initial Public Offering ◽  
Cross Sectional ◽  
Informational Frictions ◽  
Initial Return ◽  
Ipo Pricing ◽  
Hypothesis Theory ◽  
Public Offering ◽  
Pricing Rule

We derive the optimal underwriting method and the quantitative initial public offering (IPO) pricing rule that this method implies in a market with informational frictions consisting of fully rational banks, issuers, and investors. In an efficient IPO market, an issuer’s expected initial return will be determined entirely by the combination of this pricing rule and issuer fundamentals. Applying this rule, we find that we can explain the quantitative magnitude of the principal aspects of the time-series and cross-sectional variation in IPO average initial returns. We conclude that the IPO market is efficient.

Impact of IPO grading on earnings management

2015 ◽  
Vol 13 (2) ◽  
pp. 142-158 ◽  
Author(s):  
Yogesh Maheshwari ◽  
Khushbu Agrawal
Keyword(s):  
Earnings Management ◽  
Initial Public Offering ◽  
Design Methodology ◽  
Discretionary Accruals ◽  
Alternative Measure ◽  
Cross Sectional ◽  
Content Type ◽  
Public Offering ◽  
The Impact ◽  
First Time

Purpose – This paper aims to examine the impact of initial public offering (IPO) grading on earnings management by Indian companies in their IPOs. Specifically, it investigates whether earnings management significantly differs in the pre-IPO grading regime and post-IPO grading regime. Further, it examines whether earnings management significantly differs between high-graded and low-graded IPOs. Design/methodology/approach – The cross-sectional modified Jones model is used to obtain the discretionary accruals, a proxy for earnings management. The impact of IPO grading on earnings management is assessed using multiple regression analysis. Findings – Earnings management is significantly lower in graded IPOs as compared to the ones that are not graded. Further, among the graded IPOs, the high-graded IPOs exhibit lower earnings management as compared to the low-graded IPOs. The findings are robust to the use of an alternative measure for discretionary accruals. Originality/value – IPO grading in India is a unique certification mechanism, introduced for the first time in any market. This paper establishes the efficacy of this mandatory certification mechanism in reducing earnings management. The findings could be valuable to issuer companies, investors and market regulators.

Interfirm Ties Between Ventures and Limited Partners of Venture Capital Funds: Performance Effects in Financial Markets

2020 ◽  
Vol 31 (3) ◽  
pp. 698-719
Author(s):  
Umit Ozmel ◽  
Deniz Yavuz ◽  
Tim Trombley ◽  
Ranjay Gulati
Keyword(s):  
Venture Capital ◽  
Financial Markets ◽  
Initial Public Offering ◽  
Private Information ◽  
Stock Exchange ◽  
Market Uncertainty ◽  
Focal Firm ◽  
Investment Opportunities ◽  
Performance Effects ◽  
Public Offering

We argue that strong indirect ties are conducive to the transfer of private information, which provides an advantage in identifying profitable investment opportunities. In our context, a strong indirect tie is generated between an investor and a focal firm if the investor was a limited partner of the focal firm’s lead venture capital fund. We suggest that an investor can access private information on the focal firm’s underlying value through its strong indirect tie to the focal firm via the focal firm’s lead venture capitalist. Supporting our theory, we show that after the focal firm’s initial public offering, the investor with a strong indirect tie to the focal firm receives high risk-adjusted return when the investor chooses to invest in the focal firm’s stock in the stock exchange market. We also show that the investor’s private information attained through its strong indirect tie to the focal firm is more valuable (i) when there is higher exogenous market uncertainty and (ii) when the investor faces higher information asymmetry.

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