Valuation Uncertainty and Short-Sales Constraints: Evidence from the IPO Aftermarket

2021 ◽  
Author(s):  
Panos N. Patatoukas ◽  
Richard G. Sloan ◽  
Annika Yu Wang
Keyword(s):  
Detailed Analysis ◽  
Initial Public Offering ◽  
Equity Market ◽  
Short Sales ◽  
Market Data ◽  
Market Mispricing ◽  
Valuation Uncertainty ◽  
Public Offering ◽  
Lockup Expiration

We use the initial public offering (IPO) setting to provide evidence that the combination of valuation uncertainty and short-sales constraints generates significant equity market mispricing. The IPOs that we predict to be most susceptible to overpricing in the immediate aftermarket have first-day returns of +47% and lockup expiration returns of [Formula: see text]9%. Our detailed analysis of securities lending market data confirms that these IPOs experience severe short-sales constraints that peak around the lockup expiration. Our paper both explains the anomalous pricing of IPOs and highlights the importance of valuation uncertainty and short-sales constraints in explaining equity mispricing. This paper was accepted by Brian Bushee, accounting.

scholarly journals How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing

2010 ◽  
Vol 45 (2) ◽  
pp. 441-471 ◽  
Author(s):  
Björn Bartling ◽  
Andreas Park
Keyword(s):  
Theoretical Model ◽  
Initial Public Offering ◽  
Informational Efficiency ◽  
Short Sales ◽  
Market Prices ◽  
Standard Practice ◽  
Public Offering ◽  
A Company

AbstractWhen a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment option. This option is a standard feature of initial public offering (IPO) arrangements that allows the underwriter to purchase more shares from the issuer at the original offer price. We propose a theoretical model to study the implications of this combination of short position and overallotment option on the pricing of the IPO. Maximizing the sum of both the profits from their share of the offer revenue and the potential profits from aftermarket trading, we show that underwriters strategically distort the offer price. This results either in exacerbated underpricing when favorably informed underwriters lower prices to secure a signaling benefit, or in informationally inefficient offer prices when underwriters pool in offer prices irrespective of their information.

scholarly journals A Theory of Merger-Driven IPOs

2011 ◽  
Vol 46 (5) ◽  
pp. 1367-1405 ◽  
Author(s):  
Jim Hsieh ◽  
Evgeny Lyandres ◽  
Alexei Zhdanov
Keyword(s):  
Initial Public Offering ◽  
Firm Value ◽  
Empirical Support ◽  
Comparative Statics ◽  
Public Firm ◽  
Acquisition Strategy ◽  
Using Data ◽  
Valuation Uncertainty ◽  
Public Offering ◽  
The Cost

AbstractWe propose a model that links a firm’s decision to go public with its subsequent takeover strategy. A private bidder does not know a firm’s true valuation, which affects its gain from a potential takeover. Consequently, a private bidder pursues a suboptimal restructuring policy. An alternative route is to complete an initial public offering (IPO) first. An IPO reduces valuation uncertainty, leading to a more efficient acquisition strategy, therefore enhancing firm value. We calibrate the model using data on IPOs and mergers and acquisitions (M&As). The resulting comparative statics generate several novel qualitative and quantitative predictions, which complement the predictions of other theories linking IPOs and M&As. For example, the time it takes a newly public firm to attempt an acquisition of another firm is expected to increase in the degree of valuation uncertainty prior to the firm’s IPO and in the cost of going public, and it is expected to decrease in the valuation surprise realized at the time of the IPO. We find strong empirical support for the model’s predictions.

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.

Part I General Aspects, 3 Stabilization and Underpricing in IPOs

2020 ◽  
Author(s):  
Lombardo Stefano
Keyword(s):  
Economic Theory ◽  
Detailed Analysis ◽  
Initial Public Offering ◽  
Market Manipulation ◽  
Market Abuse ◽  
The Us ◽  
Insider Dealing ◽  
General Aspects ◽  
Public Offering

This chapter zooms in on stabilization and underpricing in IPOs. The Market Abuse Regulation (MAR) provides an exemption from the prohibitions of insider dealing and of market manipulation for the stabilisation of securities. This is usually realised in the case of an initial public offering (IPO) and is regulated in detail by Commission Delegated Regulation 2016/1052. The chapter thus introduces the economic theory of IPOs, analysing in particular the underpricing phenomenon (and its opposite, the overpricing). After a comparative and useful description of the US system of IPO stabilization activity, the chapter focuses on a detailed analysis of the European regime under MAR and Regulation 2016/1052.

Earnings Management During Lockup in Explaining IPO Operating Underperformance

2015 ◽  
Vol 18 (01) ◽  
pp. 1550002 ◽  
Author(s):  
Tsai-Ling Liao ◽  
Chih-Jen Huang ◽  
Hsiao-Chi Liu
Keyword(s):  
Earnings Management ◽  
Initial Public Offering ◽  
High Tech ◽  
Return On Assets ◽  
Management Behavior ◽  
Reversal Effect ◽  
Public Offering ◽  
Lockup Expiration ◽  
The Relationship

This study examines the relationship between initial public offering (IPO) managers' earnings management behavior during lockup (measured with discretionary accruals, DAs) and operating performance following lockup expiration (measured with operating return on assets, OPROAs). Based on a U.S. IPO sample, the results indicate that DAs during lockup are significantly higher than after lockup expiration. In addition, the reversal effect of DAs results in a negative association of DAs in lockup with post-lockup OPROAs. This negative relation is primarily concentrated in small-sized, non-venture backed, high-tech, and hot-market issued IPOs and is consistent with prior findings that such IPO firms have poorer post-issue performance. The overall evidence supports the role of managerial earnings management behavior during lockup in explaining post-IPO operating underperformance.

scholarly journals Equity Market Timing Dan Struktur Modal Pada Perusahaan Keluarga Di Indonesia

2015 ◽  
Vol 2 (2) ◽  
pp. 186-197
Author(s):  
Chorry Sulistyowati
Keyword(s):  
Initial Public Offering ◽  
Market Timing ◽  
Equity Market ◽  
Corporate Action ◽  
Public Offering ◽  
Equity Market Timing

Perusahaan keluarga memiliki peranan penting dalam perekonomian dunia, termasuk negara Indonesia. Ciri khas dari perusahaan keluarga ini adalah pendiriannya diprakarsai oleh salah satu atau beberapa anggota keluarga, kemudian dikelola bersama oleh satu keluarga mulai dari direktur, komisaris, jajaran manajer dan karyawan setelah itu diwariskan secara turun temurun kepada keturunannya. Salah satu upaya yang menjadi pilihan perusahaan keluarga untuk mengembangkan skala bisnis adalah dengan berbagi kepemilikan dengan pihak lain. Perusahaan melakukan corporate action yakni Initial Public Offering (IPO) pada pasar primer. Penelitian ini merupakan pengujian empiris equity market timing dan struktur modal pada perusahaan-perusahaan keluarga yang melakukan IPO tahun 2001 sampai dengan 2005. Kata kunci : Perusahaan keluarga, Initial Public Offering, equity market timing, struktur modal

Pengaruh Reputasi Underwriter, Umur Perusahaan, dan Persentase Penawaran Saham 53 kepada Publik terhadap Underpricing

2016 ◽  
Vol 8 (1) ◽  
pp. 53-74
Author(s):  
Maria Jeanne ◽  
Chermian Eforis
Keyword(s):  
Initial Public Offering ◽  
Stock Price ◽  
Stock Exchange ◽  
Secondary Data ◽  
Secondary Market ◽  
Financial Statement ◽  
Data Set ◽  
Multiple Regression Method ◽  
Underwriter Reputation ◽  
Public Offering

The objective of this research is to obtain empirical evidence about the effect of underwriter reputation, company age, and the percentage of share’s offering to public toward underpricing. Underpricing is a phenomenon in which the current stock price initial public offering (IPO) was lower than the closing price of shares in the secondary market during the first day. Sample in this research was selected by using purposive sampling method and the secondary data used in this research was analyzed by using multiple regression method. The samples in this research were 72 companies conducting initial public offering (IPO) at the Indonesian Stock Exchange in the period January 2010 - December 2014; perform initial offering of shares; suffered underpricing; has a complete data set forth in the company's prospectus, IDX monthly statistics, financial statement and stock price site (e-bursa); and use Rupiah currency. Results of this research were (1) underwriter reputation significantly effect on underpricing; (2) company age do not effect on underpricing; and (3) the percentage of share’s offering to public do not effect on undepricing. Keywords: company age, the percentage of share’s offering to public, underpricing, underwriter reputation.

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