IPO Pricing and Dealers’ Interaction: A Stochastic Frontier Approach

This study investigates the impact of ongoing relationships between underwriters and institutional investors on Initial Public Offerings (IPO) pricing. Differently from previous studies that are focused on allocations of underpriced shares we propose a model of primary market pricing in which the incomplete adjustment of the offer price to its maximum achievable level depends on the intensity of interactions that occurred between players in the years before the IPO. Using a stochastic frontier approach on a sample of 1 677 US IPOs between 2000 and 2016 the paper shows that the more investment banks and investors regularly work together the more the IPO offer price is set closer to the fair value of the issuing firm. This analysis helps to disentangle the ambiguous effects of underwriters’ discretion on IPO primary market pricing when bookbuilding is used. We then support the idea that banks can maximize value to issuers by fostering a regular clientele of investors.

Review of IPO Primary Market Pricing Literature

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.

Strategic Timing of IPOs and Disclosure: A Dynamic Model of Multiple Firms

We study a dynamic timing game between multiple firms, who decide when to go public in the presence of possible information externalities. A firm's IPO pricing is a function of its privately observed idiosyncratic type and the level of investor sentiment, which follows a stochastic, mean-reverting process. Firms may wish to delay their IPOs in order to observe the market reception of the offerings of their peers. We characterize the unique symmetric threshold equilibrium, whereby pioneer firms with high idiosyncratic types endogenously emerge. The results provide novel implications regarding variation in IPO timing, sequential clustering, IPO droughts, the composition of new issues over time, and how IPO volume fluctuates over time. These include, among others, that in more populated industries, a lower proportion of firms emerge as industry pioneers, but follower IPO volume is intensified. Additionally, heightened uncertainty over investor sentiment exacerbates delay and leads to lower IPO volume.

Assessing Need and Level of Agreement among Market Participants in Adopting Book Building Pricing in Nepal

This paper aims at assessing the need of book building pricing of IPOs as well as the level of agreement among market participants on its application in the context of Nepal. This study is based on a cross-sectional analysis of survey data of 71 respondents comprising 19 issue managers, 16 portfolio managers, six share registrars, 10 mutual funds, nine stock brokers and 11 retail investors, for the months of January and February 2020. Mainly, descriptive statistics and inferential statistics like one-way ANOVA have been used in the study to assess the need and level of agreement in adopting book building pricing. The study revealed that there is an urgent need of adopting book building mechanisms of IPO pricing in Nepal because the existing primary market is inefficient and there is a huge wealth loss of existing shareholders in terms of higher underpricing on equity offerings. The role of institutional investors followed by underwriters is found crucial especially to discover price band and final price i.e. cut-off price, of offerings under book building. Further, the level of agreement in adopting book building pricing in Nepal’s capital market is positive because (i) the price band is determined with the active support of qualified institutional investors, (ii) it lowers the degree of underpricing of IPOs than that of par value method, and (iii) book building help prevents „random free riders‟ from overwhelming the process of IPOs. Mainly, more active market participants, like issue managers, portfolio managers, and stockbrokers, have a high level of agreement in adopting book building pricing. The study findings associated with book building pricing are crucial and highly applicable in order to formulate policies and implementation of new pricing mechanism in Nepal. Implementation of book building pricing will contribute to reduce level of underpricing, attract real sector companies and/or foster the primary market efficiency in future.