Why Do IPO Offer Prices Only Partially Adjust?

2014 ◽  
Vol 04 (03) ◽  
pp. 1450009 ◽  
Author(s):  
Özgür Ş. İnce
Keyword(s):  
Initial Public Offering ◽  
Private Information ◽  
Information Acquisition ◽  
Structural Model ◽  
Public Information ◽  
Public And Private ◽  
New Information ◽  
Pricing Process ◽  
Ipo Pricing ◽  
Public Offering

This study develops a structural model of the initial public offering (IPO) pricing process that enables the estimation of adjustment rates for public and private pricing information gathered during bookbuilding. The estimated upward adjustment rate of public information is only 21%, significantly less than the 28% rate of private information. Adjustment rates decline towards the IPO date, especially for upward adjustments. The findings contradict information acquisition theories that predict a complete adjustment to public information and highlight the inefficiency of the IPO bookbuilding mechanism in handling new information even when information is publicly available and especially when it is favorable.

scholarly journals Review of IPO Primary Market Pricing Literature

2020 ◽  
Vol 9 (4) ◽  
pp. 32
Author(s):  
Sabrina Severini
Keyword(s):  
Initial Public Offering ◽  
Market Price ◽  
Secondary Market ◽  
Investment Banks ◽  
Market Pricing ◽  
Pricing Process ◽  
Ipo Pricing ◽  
Public Offering ◽  
Key Participants ◽  
The Way

The aim of this paper is to offer a comprehensive review of Initial Public Offering literature on the pricing and interactions that occur in the IPO primary market. Among the multitude of variables that might affect the way shares are priced and sold in new offerings, the role of previous relationships between issuing firms, investment banks, and institutional investors, i.e. key participants in the listing process, is the object of analysis in the present paper. Existing mixed evidence suggests that repeated interactions among the major players could influence the IPO results in two ways: either by reducing asymmetric information problems or by determining opportunistic behaviours which can be seen in well-known secondary market price anomalies. The originality of the paper lies in the fact that it is the first to provide a review of literature on IPO primary market dynamics, thereby highlighting the way in which relationships between key parties of an IPO shape the entire pricing process. Moreover, this study points out the importance of shifting attention to this market in order to better understand IPO pricing dynamics.

Earnings Management and Ownership Retention for Initial Public Offering Firms: Theory and Evidence

2007 ◽  
Vol 82 (1) ◽  
pp. 27-64 ◽  
Author(s):  
Qintao Fan
Keyword(s):  
Earnings Management ◽  
Initial Public Offering ◽  
Private Information ◽  
Comparative Statics ◽  
Future Earnings ◽  
Ipo Pricing ◽  
Public Offering ◽  
Equilibrium Market ◽  
Reported Earnings ◽  
Empirical Implications

This paper investigates, both theoretically and empirically, how earnings management and ownership retention interact, and how these two jointly affect the equilibrium market valuation of IPO firms in the presence of information asymmetry. Analytically, this paper extends the univariate signaling framework of Leland and Pyle (1977) and derives an efficient signaling equilibrium in which both reported earnings and ownership retention are endogenously chosen to convey the IPO issuer's private information. It is shown that even though either ownership retention or reported earnings communicates the issuer's type to the market unambiguously, the issuer will strategically employ both signals to achieve separation from potential lower quality imitators at minimal cost. Comparative statics analysis shows that the trade-off between the two signals depends critically on the uncertainty over future earnings. The theoretical analysis generates several empirical implications regarding market efficiency, IPO pricing, and the strategic choice of earnings management. Through systematic econometric analysis, I confirm the major predictions of the model.

scholarly journals IPO Pricing Phenomena: Empirical Evidence Of Behavioral Biases

2011 ◽  
Vol 6 (4) ◽  
Author(s):  
Michael Adams ◽  
Barry Thornton ◽  
George Hall
Keyword(s):  
Initial Public Offering ◽  
Behavioral Finance ◽  
Efficient Market Hypothesis ◽  
Class Action ◽  
Investment Horizon ◽  
Efficient Market ◽  
The Past ◽  
Ipo Pricing ◽  
Public Offering ◽  
Substandard Performance

Does IPO stand for Instant Profit Opportunity or It’s Probably Over-priced?  The conundrum is that both answers are generally correct.  The answer appears to depend on the investor’s investment horizon.  This realization provides an enigma for the Efficient Market Hypothesis (EMH) proponents. It is widely known that initial public offering (IPO) stocks in the past have typically been underpriced, thereby allowing the fortunate purchaser to buy the shares in the primary market and systematically beat the stock market averages. This phenomenon is evidenced by the average one-day returns on IPOs of 15% and presents a puzzle to efficient market advocates. Behavioral finance posits that the same underpriced IPO stocks will under-perform the market and deliver substandard performance during the ensuing one to three years. At a minimum, the “new-issues puzzle” presents a challenge to the EMH and has given rise to many class-action stockholder lawsuits alleging illegal price manipulation.   Why under-pricing systematically happens and why issuing firms/major shareholders choose to leave copious amounts of money on the table is not well explained by traditional financial theory.  Behavioral finance melds together investor psychology and normative financial theory in an attempt to explain this market enigma.

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.

Price Determination in Public Offering and Evaluation Methods

2015 ◽  
pp. 144-165
Author(s):  
Ümit Hacıoğlu ◽  
Hasan Dinçer ◽  
Zuhal Akça
Keyword(s):  
Performance Evaluation ◽  
Initial Public Offering ◽  
Capital Markets ◽  
Evaluation Methods ◽  
Price Determination ◽  
Key Factors ◽  
Advanced Economies ◽  
Ipo Pricing ◽  
And Performance ◽  
Public Offering

The latest financial situation in capital markets in advanced economies, emerging markets, and the Euro zone illustrates that volatility and risks related to global economic activity and global financial markets have impact on local capital markets and directly affects the value of company stocks even though an investor diversified his/her risk by investing in a portfolio. The initial public offering process, performance evaluation methods, and price determination became key factors for companies and investors. In this chapter, advantages and disadvantages of IPO, pricing methods and performance evaluation methods are assessed.

Price Determination in Public Offering and Evaluation Methods

2017 ◽  
pp. 1293-1315
Author(s):  
Ümit Hacıoğlu ◽  
Hasan Dinçer ◽  
Zuhal Akça
Keyword(s):  
Performance Evaluation ◽  
Initial Public Offering ◽  
Capital Markets ◽  
Evaluation Methods ◽  
Price Determination ◽  
Key Factors ◽  
Advanced Economies ◽  
Ipo Pricing ◽  
And Performance ◽  
Public Offering

The latest financial situation in capital markets in advanced economies, emerging markets, and the Euro zone illustrates that volatility and risks related to global economic activity and global financial markets have impact on local capital markets and directly affects the value of company stocks even though an investor diversified his/her risk by investing in a portfolio. The initial public offering process, performance evaluation methods, and price determination became key factors for companies and investors. In this chapter, advantages and disadvantages of IPO, pricing methods and performance evaluation methods are assessed.

U.S. Big 4 and Local Auditors in the China Initial Public Offering Market

2019 ◽  
Vol 22 (04) ◽  
pp. 1950024 ◽  
Author(s):  
Zhi-Yuan Feng ◽  
Hua-Wei Huang ◽  
Mai Dao
Keyword(s):  
Initial Public Offering ◽  
Audit Quality ◽  
Audit Fees ◽  
Agency Conflicts ◽  
Accounting Firms ◽  
Corporate Fraud ◽  
Big 4 ◽  
Investment Distortions ◽  
Ipo Pricing ◽  
Public Offering

This paper examines (1) whether auditor type affects initial public offering (IPO) pricing; (2) whether the effect of IPO pricing is different for clients with different ownership structures. We find that (1) firms being audited by Big 4 accounting firms receive IPO premium while others being audited by local accounting firms do not; (2) Big 4 auditors receive higher audit fees than China’s Top 10 or small local auditors. This paper extends the prior research (e.g., Kumar, P and N Langberg (2009). Corporate fraud and investment distortions in efficient capital markets. The RAND Journal of Economics, 40, 144–172) that reduces agency conflicts between shareholders and manager (by means of better audit quality) and also reconciles corporate misreporting and investment distortions.

scholarly journals Signalling, Insider Trading, And Post-Offering Performance: The Case Of Initial Public Offerings

2011 ◽  
Vol 9 (3) ◽  
pp. 80 ◽  
Author(s):  
Thomas H. Eyssell ◽  
Donald R. Kummer
Keyword(s):  
Initial Public Offerings ◽  
Initial Public Offering ◽  
Insider Trading ◽  
Going Public ◽  
Public Offerings ◽  
Corporate Insiders ◽  
Ipo Pricing ◽  
Public Offering

Previous IPO studies have concluded that, on average, (1) the shares of firms going public are underpriced at the time of the offering, (2) prices adjust rapidly in the aftermarket, and (3) IPOs are generally poor performers over the longer-term. This study reevaluates the IPO pricing phenomenon utilizing more recent data and empirically tests the signaling models of Leland and Pyle (1977) and Gale and Stiglitz (1989), which imply that both first-day and aftermarket returns may be related to insiders transactions. Our results suggest that initial returns are inversely related to the proportion of the offering representing insiders share and that corporate insiders are, on average, net sellers in the year subsequent to the initial public offering. We also find that the greatest volume of post-offering insider sales occurs in those firms in which insiders are sold shares at the offering.

scholarly journals Efficiency of the Experimental Prediction Market: Public Information, Belief Evolution, and Personality Traits

2021 ◽  
pp. 39-59
Author(s):  
Bin-Tzong Chie ◽  
Chih-Hwa Yang
Keyword(s):  
Personality Traits ◽  
Private Information ◽  
Positive Impact ◽  
Market Price ◽  
Public Information ◽  
Jel Classification ◽  
Public And Private ◽  
Market Prices ◽  
Aggregate Information ◽  
Experimental Prediction

Abstract This paper examines the ability of markets to aggregate information so that the price generated from the market contains the best estimate of all the available information. The paper investigates how individuals “update” their initial beliefs from their public and private information in light of market prices. In particular, the paper looks at individuals' weighting of public information versus private information. Also, the volume of information in the market via an increased number of traders with private information has a positive impact on the quality of the market price. Lastly, the personality traits of the traders seem to provide some positive impact if the traders are diverse in terms of the proportion of “efficient and organized” traders in the market. JEL classification numbers: C91, C92, D82 Keywords: Experimental economics, Prediction markets, Belief, Market efficiency, Personality traits.

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