IPOS - not so much money on the table. The cost compensation hypothesis

IPOS - not so much money on the table. The cost compensation hypothesis

 

Adam Zaremba, Karol Kamiński

 

Keywords: post-IPO performance, Polish stock market, underpricing, long-term underperformance, hot issue markets

 

Summary: One of the most extensively documented anomalies concerning initial public offerings is IPO underpricing. Although the phenomenon is well analyzed and explained, most of the research ignores an individual investor’s costs, constraints and perspective. We suppose that after taking these issues into consideration, there may be not much money left on the table.

The paper consists of three main parts. First, we characterize IPO underpricing anomaly and review the performance patterns from many countries together with their theoretical explanations. In the second section, we indicate the usually ignored issues which may potentially significantly impede IPO investments. The last part of the paper presents the empirical analysis based on 209 offerings in the Polish stock market between 2001 and 2010. The paper comes to the conclusion that high IPO returns result from just a few outliers and are not significantly higher than the benchmark returns. As we have hypothesized, IPO underpricing seems to be just a compensation for costs and time constraints faced by investors.

 

References: 

Allen, F., Faulhaber, G., Signaling by Underpricing in the IPO Market, “Journal of Financial Economics”, Vo. 23, pp. 303-323, 1989.

Booth J., Chua L., Ownership dispersion, costly information and IPO underpricing, “Journal of Financial Economics” Vol. 41, pp. 291-310, 1996.

Chalk, A. J., Peavy, J. W., Initial Public Offerings: Daily Returns, Offering Types and the Price Effect, “Financial Analysts Journal”, pp. 65-69, 1987.

Chemmanur, T., The Pricing of Initial Public Offerings: a Dynamic Model with Information Production, “Journal of Finance”, Vol. 48, pp. 285-304, 1993.

Damodaran A., Investment fables: exposing the myths of can't miss investment strategies, “FT Press”, p. 220, 2004.

Ellul, A., Pagano, M., IPO Underpricing and After-market Liquidity, “Review of Financial Studies”, Vol.19, No. 2, pp. 381-421, 2006.

Fama E. F., French, K. R., The Cross-Section of Expected Stock Returns, “Journal of Finance” Vol. 47, pp. 427-465, 1992.

Fung, J., Cheng, L., Chan, K., The Impact of the Costs of Subscription on Measured IPO Returns: The Case of Asia, “Journal of Corporate Finance”, Vol. 10, No. 3, pp. 459-465, 2004.

Fung, J., Che, S., Initial Day Return and Underpricing in Advance Payment Initial Pricing Offering, “Hongkong Institute for Monetary Research”, 2010.

Grinblatt, M., Hwang, C., Signaling and the Pricing of New Issues, “Journal of Finance”, Vol. 44, pp. 393-420, 1989.

Jegadeesh, N., Weinstein, M., Welch, I., An empirical investigation of IPO returns and subsequent equity offerings, “Journal of Financial Economics”, Vol. 34, pp. 153-175, 1993.

Jenkinson T., Ljungqvist, A., Going Public: The Theory and Evidence on How Firms Raise Equity Finance, p. 65. Oxford University Press, New York, 2001.

Megginson, W. L., Megginson, D., Meggison, W., Corporate Finance Theory, pp. 434-435. Addison Wesley, 1997.

Narang, R. K., Inside the Black Box: The Simple Truth About Quantitative Trading. Wiley, 2009.

Rajan, R. G., Servaes, H., The effect of market conditions on initial public offerings, “Journal of Finance”, Vol.52, pp. 507-529, 1997.

Ritter, J. R., The long-run performance of initial public offerings, “Journal of Finance” Vol. 46, pp. 3-27, 1991.

Ritter, J. R., Initial Public Offerings, Warren Gorham & Lamont Handbook of Modern Finance, p.12, USA, 1998.

Ritter, J. R., The Hot Issue Market of1980, “Journal of Business” Vol. 57, pp. 215-240, 1984.

Ritter, J., Money Left on the Table in IPOs by Firm, working paper, University of Florida [online], http://bear.warrington.ufl.edu/ritter/MoneyOnTheTable.pdf [02.03.2011], 2009.

Rock, K., Why IPOs are under-priced, “Journal of Financial Economics” Vol. 15, pp. 1051­1069, 1986.

Rydqvist, K., IPO Underpricing as Tax-Efficient Compensation, “Journal of Banking and Finance” Vol. 2, p. 299, 1997.

Simon, C. J, The Effect of the 1933 Securities Act on Investor Information and the Performance of New Issues, 1997.

Van Bommel, J., Messages from market to management: the case of IPO's, “Journal of Corporate Finance”, 8, 2,123-138, 2002.

Welch, I., Sequential sales, learning and cascades, “Journal of Finance”, pp. 695-732, June 1992.

Welch, I., Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings, “Journal of Finance”, Vol. 44, pp. 421-449, 1989.

 

 

Download PDF

Read 1118 times Last modified on Thursday, 27 February 2014 10:47