ipo underpricing and flotation methods in taiwan a stochastic frontier approach adopting stochastic frontier analysis this article studies the pricing model and underpricing phenomenon of the initial public offerings ipos in taiwan and further elucidates the potential impact of offering mechanisms on underpricing the sampling period is from 1996 to 2003 in which 647 ipos are selected empirical results suggest that issuing firms with greater earning potentials less risk or less asymmetric information have lower underpricing furthermore the variables included to explain underpricing are mostly significant especially the proxy variable for flotation method observed mean ipo underpricing is 20 59 in the sample period compared to 17 12 for the subgroup using the auction method this statistically significant difference implies that the introduction of the auction method can help reduce ipo underpricing

bookbuilding and strategic allocation in the bookbuilding procedure an investment banker solicits bids for shares from institutional investors prior to pricing an equity issue the banker then prices the issue and allocates shares at his discretion to the investors we examine the books for 39 international equity issues we find that the investment banker awards more shares to bidders who provide information in their bids regular investors receive favorable allocations especially when the issue is heavily oversubscribed the investment banker also favors revised bids and domestic investors investment banks commonly build a book before pricing an equity issue in the united states it has been standard practice for a number of years in many other countries where fixed price offerings were traditionally used the bookbuilding procedure is becoming increasingly common especially for international equity issues 1 under the formal bookbuilding procedure the investment banker solicits indications of interest from institutional investors such indications consist of a bid for a quantity of shares and might include a maximum price i e a limit price or other details the investment banker uses the information to construct a demand curve the issue price is not set according to any explicit rule but rather based on the banker s interpretation of investors indications of interest he generally sets the price at a level at which demand exceeds supply and then allocates shares to the bidders at his discretion thus the

why initial public offerings are underpriced evidence from switzerland abstract the underpricing of initial public offerings is a well documented phenomenon for almost every equity market that has been examined in switzerland for a sample of 42 stocks that were issued in the market between 1983 and 1989 a 35 8 percent average initial return between the offering price and the closing price on the first trading day is found in switzerland the excess returns from offering price persist for at least three years however if the purchase is made at the first day s closing price then the three year returns are negative the paper discusses special institutional settings in the swiss stock market and provides some explanations implying that underpricing can be regarded as an equilibrium situation

initial public offer underpricing the issuer s view a note many studies for example bear and curley 1 beatty and ritter 2 block and stanley 3 ibbotson 4 ibbotson and jaffe 5 logue 6 mcdonald and fisher 7 neuberger and la chapelle 8 reilly 9 and ritter 10 11 show that initial public offers ipos are underpriced on average when offered to the public all these studies focus on the difference between the offer price and the observed market price which is the return earned by new investors only a few studies refer to issuer oriented measures of underpricing and each also uses the observed market price as the benchmark bear and curley 1 for example based the efficiency of new issue pricing on the relationship between the offering price and the initial secondary market price ibbotson 4 used the market price to describe various explanations for underpricing from the issuer or underwriter s perspective ritter 11 developed a detailed pricing analysis for the choice between firm commitment and best efforts underwriting contracts but the comparison price remained the post issue market price a similar reliance upon the observed market price in measuring ipo underpricing is found in corporate finance textbooks this note demonstrates that traditional investor oriented measures of underpricing may mislead issuers ipos do not simply have a cost with the opposite sign of the investors return rather underpriced new shares create a dilutive effect that may make their real cost or wealth transfer much different section i develops an alternative measure of underpricing that is issuer oriented and documents the difference between the two measures using ipos issued in singapore from 1978 1985 section ii analyzes the increased costs for issuers of underpricing ipos using the new measure of underpricing

ipo pricing in hot market conditions who leaves money on the table this paper explores the impact of investor sentiment on ipo pricing using a model in which the aftermarket price of ipo shares depends on the information about the intrinsic value of the company and investor sentiment i show that ipos can be overpriced and still exhibit positive initial return a sample of recent french offerings with a fraction of the shares reserved for individual investors supports the predictions of the model individual investors demand is positively related to market conditions moreover large individual investors demand leads to high ipo prices large initial returns and poor long run performance the end of the nineties was one of the hottest ipo markets ever in this period both the number of initial public offerings and the level of initial returns have reached unprecedented peaks ritter documents that in 1999 and 2000 only 803 companies went public in the united states raising about 123 billion and leaving about 62 billion on the table in the form of initial returns periodically such periods of ipo euphoria occur these so called hot issue markets are characterized by high ipo volumes and high levels of initial return see ibbotson and jaffe 1975 and ritter 1984 as well as positive serial correlation of ipo initial returns and correlation between recent levels of initial return and current ipo volume surprisingly however pre ipo shareholders do not seem to be upset about leaving so much money on the table loughran and ritter 2002 explain this phenomenon by the fact that insiders of ipo companies consider not only the shares they sell in the ipo but also those they retain which benefit from the large initial price run up ljungqvist and wilhelm 2003 show that during the 1999 to 2000 period ipo companies were significantly different from usual

the communications and information economy issues tariffs and economics research areas abstract this survey paper analyses some of the fundamental economic issues concerning the communications and information economy the first highlighted major trends are the balkanisation of the communications networks and the advent of competitive tariffs this leads to a move away from time and distance based charges to tariffs covering bandwidth service and contents use it is noted that very few resources have gone into the analysis of that sector and its inter relations with others the paper advocates for more visibility and research into the unique aspects of the communications and information sector it does so by making an inventory of key economics and computational economics research issues in need of contributions selected from the following areas public communications infrastructure and tariffing principles sales of communications services public access and equal access policies competitive access pricing communications industry finance engineering economic studies information contents macroeconomic issues finally the specific aspects of models of the communications and media sector are addressed in view of modelling work this includes variables pricing and production models for both communications and information contents the most unique contribution is here a formal model for quantifying and pricing knowledge both for consumption and for assets building

ipo underpricing in supply and demand framework evidence from a market of retailers abstracthow do supply demand and allocation of shares on the underpricing of initial public offerings ipos affect the shape and steepness of supply and demand curves theoretical studies posit that subscribers flip in ipos immediately on the listing day to capture instantaneous profits consistent with this hypothesis we find that both curves of the market listing day of ipos are significantly negatively sloped with the supply curve being much steeper and above the demand curve the excess demand that occurs during the subscription period becomes excess supply once the shares start to float on the listing day overall we establish a strong empirical link between the underpricing puzzle and the aftermarket interaction of ipos

good ipos draw in bad inelastic banking capacity and hot markets we posit that screening ipos requires specialized labor which is in fixed supply a sudden increase in demand for ipo financing increases the compensation of ipo screening labor this results in reduced screening encouraging sub marginal firms to enter the ipo market further fueling the demand for screening labor the model s conclusions are consistent with empirical findings of increased underpricing during hot markets positive correlation between issue volume and underpricing and with tipping points between hot and cold markets finally the model makes sharp predictions relating the ipo market to fundamental values of firms and to investment banking returns

the development of securities law in the united states given the existence of contract property fraud and company law what is the purpose of securities laws broadly speaking they can serve either of two functions or some mix of both the first is to facilitate contracting among entrepreneurs managers shareholders and financial intermediaries by providing a standardized set of rights and obligations la porta et al 2005 such laws are motivated by the desire to reduce transaction costs where contracting parties are widely dispersed and both writing complete contracts ex ante and renegotiating ex post are difficult a second possible function is to restrict contracting by limiting the set of legally available terms such laws reflect the view that securities markets are beset by market failures stemming from externalities or investor irrationality coffee 1984 fox 1999 langevoort 2002 for the sake of simplicity we can call the first a contracting paradigm and the second a regulatory paradigm

delegated portfolio management abstract a problem of screening agents with privately known forecasting abilities and reservation utilities and then eliciting truthful information from these agents once they are employed is considered for the case of risk averse agents and large principals an approximately optimal solution is constructively characterized under the assumption that payoffs are normally distributed a significant extension of the definnetti savage probability elicitation result is developed under this extension knowledge of agent preferences is not required when the underlying conditional distributions are symmetric and this fact is exploited to solve the screening problem in a mean variance formulation

elite law firms in the ipo market abstract ipos with underwriters that retain an elite law firm exhibit a lower average first day return this empirical pattern remains after controlling for an extensive set of proxies associated with existing explanations of ipo initial returns we rationalize this finding with a pre ipo pricing model in which underwriters convey their lack of conflicts of interest to the issuer by engaging an elite law firm consistent with this selection channel and our model s predictions we find a lower incidence of elite law firm involvement and a larger difference in average first day return associated with elite law firms during the dot com period we document similar findings with respect to the dispersion of ipo first day returns and a pattern in the issuers re hiring decision of investment banks consistent with our theory

litigation risk and ipo underpricing abstract we examine the relation between risk and ipo underpricing and test two aspects of the litigation risk hypothesis 1 firms with higher litigation risk underprice their ipos by a greater amount as a form of insurance insurance effect and 2 higher underpricing lowers expected litigation costs deterrence effect to adjust for the endogeneity bias in previous studies we use a simultaneous equation framework evidence provides support for both aspects of the litigation risk hypothesis

an expository note on individual risk without aggregate uncertainty abstract in economies where agents bear some risk the analysis would often be facilitated by the assumption that the risks are i i d and disappear in the aggregate a formal appeal to the law of large numbers requires the consideration of a sequence of finite economies in an economy with a continuum of agents there are countable families of sets for which it is impossible for a law of large numbers to be valid with countably many agents and a finitely additive measure independence is compatible with the law of large numbers

allocation of initial public offerings and flipping activity abstract there is a general perception that the large trading volume in initial public offerings is mostly due to flippers that are allocated shares in the offering and immediately resell them on average however flipping accounts for only 19 of trading volume and 15 of shares offered during the first two days of trading institutions do more flipping than retail customers and hot ipos are flipped much more than cold ipos institutions do not quickly flip cold ipos to take advantage of price support activities by the underwriter explicit penalty bids are rarely assessed against flippers

monotone equilibria in bayesian games of strategic complementarities for bayesian games of strategic complementarities we provide a constructive proof of the existence of a greatest and a least bayes nash equilibrium each one in strategies that are monotone in type our main assumptions besides strategic complementarities are that each player s payoff displays increasing differences in own action and the profile of types and that each player s interim beliefs are increasing in type with respect to first order stochastic dominance e g types are affiliated the result holds for general action and type spaces single multi or infinite dimensional continuous or discrete and no prior is assumed we also provide the following comparative statics result the greatest and least equilibria are higher if there is a first order stochastic dominant shift in the interim beliefs we apply this result to strategic information revelation in games of voluntary disclosure

do auctions induce a winner s curse new evidence from the corporate takeover market abstract we contrast the winner s curse hypothesis and the competitive market hypothesis as potential explanations for the observed returns to bidders in corporate takeovers the winner s curse hypothesis posits suboptimal behavior in which winning bidders fail to adapt their strategies to the level of competition and the amount of uncertainty in the takeover environment and predicts that bidder returns are inversely related to the level of competition in a given deal and to the uncertainty in the value of the target our measure of takeover competition comes from a unique data set on the auction process that occurs prior to the announcement of a takeover in our empirical estimation we control for the endogeneity between bidder returns and the level of competition in takeover deals controlling for endogeneity we find that the returns to bidders are not significantly related to takeover competition we also find that uncertainty in the value of the target does not reduce bidder returns related analysis indicates that prestigious investment banks do not promote overbidding analysis of post takeover operating performance also fails to find any negative effects of takeover competition as a whole the results indicate that the breakeven returns to bidders in corporate takeovers stem not from the winner s curse but from the competitive market for targets that occurs predominantly prior to the public announcement of bids

ipo first day returns offer price revisions volatility and form s 1 language abstract form s 1 is the first sec filing in the initial public offering ipo process the tone of the s 1 in terms of its definitiveness in characterizing the firm s business strategy and operations should affect investors ability to value the ipo we find that ipos with high levels of uncertain text have higher first day returns absolute offer price revisions and subsequent volatility our findings provide empirical evidence for the theoretical models of uncertainty bookbuilding and prospect theory

attack defence and contagion in networks sanjeev goyal acknowledges support from a keynes fellowship cambridge inet institute and european research area complexity net resilience and interaction of networks in ecology and economics adrien vigier acknowledges support from a gates cambridge fellowship as well as a core fellowship from universite catholique de louvain

on perfect foresight models of a stochastic world long run analysis is often based on perfect foresight equilibrium relationships arbitrarily augmented to incorporate stochastic shocks this paper examines whether perfect foresight models admit interpretations as limits of stochastic economies and reflect long run behavior and policy effects it provides a novel interpretation of such models specifies consistency criteria for long run analysis and proposes metrics for model convergence analytical and calibration exercises are conducted to show that convergence to perfect foresight need not occur and even when it occurs it does not ensure that relationships between long run averages or low frequency components are captured by perfect foresight models copyright 1994 by royal economic society

interaction protection and epidemics abstract individuals respond to the risk of contagious infections by restricting interaction and by investing in protection we develop a model that examines the trade off between these two actions and the consequences for infection rates there exists a unique equilibrium individuals who invest in protection choose to interact more relative to those who do not invest in protection changes in the contagiousness of the disease have non monotonic effects as a result interaction initially falls and then rises while infection rates too may initial increase and then decline we then consider a society with two communities that differ in their returns from interaction high and low individuals in isolated communities exhibit different behavior the high community has a higher rate of protection and interaction and a lower rate of infection integration amplifies these differences

seasonal darkness and ipo abstract this paper analyses the possible relationship between a particular natural phenomenon the shortening of light hours in autumn and a financial issue the level of underpricing recorded on the first day of listing by the companies subject to initial public offering ipo it analyses a sample of 3102 ipos in 32 countries in the period between january 1 2006 and december 31 2016 the empirical evidence supports the assumption that seasonal darkness when there is a lack of light has a positive impact on the raw initial returns of the ipos made during this period the results obtained confirm the previous studies aimed at investigating the phenomenon suggest a possible behavioral interpretation and in conclusion make a positive contribution deriving from the large sample size the consideration of different latitudes and the assumed perspective

vagabond shoes longing to stray why foreign firms list in the united states abstract how do firms that go public decide whether to list on a major stock exchange or locally using a unique data set on israeli ipos in the us and tel aviv we show that companies that list in the us are young and overwhelmingly high tech oriented we argue that high quality innovative firms are willing to incur additional costs associated with listing in the us in order to reveal their value and distinguish themselves from firms that issue stock back home costs of listing in the us include first day underpricing and relinquishing corporate control

price stabilization as a bonding mechanism in new equity issues abstract underwriters have an incentive to overstate investor interest in order to persuade some investors to purchase shares at a price in excess of their initial estimate of the fair value we show that this incentive is eliminated when the underwriter commits to secondary market price stabilization destroying the underwriter s incentive to overstate interest reduces the total surplus captured by initial investors in initial public offerings further efficiency gains are associated with penalty bid systems that permit the underwriter to make the stabilization commitment selectively price stabilization can thus be viewed as a bonding mechanism that improves the efficiency of the primary equity market

australian ipo pricing in the short and long run abstract we analyse both initial underpricing and post listing returns for australian ipos our results are consistent with the view that unique institutional characteristics may have overwhelmed previous australian tests of equilibrium models of ipo underpricing the results also show that australian ipos significantly underperform market movements in the three year period subsequent to listing further investigation of these anomalous post listing returns lead us to reject various speculative bubble explanations rather the evidence suggests a curvilinear relationship between initial and subsequent returns although the economic significance of the relationship is low

share issue privatizations as financial means to political and economic ends abstract this study examines how political and economic factors affect the offer price share allocation and other terms governments choose when they privatize state owned enterprises via a public share offering using a 59 country sample of 630 share issue privatizations sips with total proceeds of over 446 billion during the period 1977 1997 we find that governments consistently underprice sip offers tilt their share allocation patterns to favour domestic investors impose control restrictions on privatized firms and typically use fixed price offers rather than book building or competitive tender offers all to further political and economic policy objectives

the winner s curse legal liability and the long run price performance of initial public offerings in finland abstract rationing data for initial public offerings ipos in the finnish market make possible a test of rock s 1986 winner s curse hypothesis the evidence from 80 ipos issued between 1984 and 1989 confirms the presence of the winner s curse average returns adjusted for the bias in allocation are lower than average unadjusted returns but the initial returns of these ipos appear unrelated to lawsuit avoidance as the sample firms seem unlikely to incur legal liabilities in the long run consistent with the evidence in the united states the ipo firms substantially underperform the helsinki stock exchange value weighted index

bank discrimination holding bank ownership and economic consequences evidence from china abstract this paper finds that compared with chinese state owned firms non state owned firms have a greater propensity to hold significant ownership in commercial banks these results are consistent with the notion that because non state owned firms are more likely to suffer bank discrimination for political reasons they tend to address their financing disadvantages by building economic bonds with banks we also find that among non state owned firms those that hold significant bank ownership have lower interest expenses and are less likely to increase cash holdings but more likely to obtain short term loans when the government monetary policy is tight these results suggest that the firms building economic bonds with banks can enjoy benefits such as lower financial expenses and better lending terms during difficult times finally we find that non state owned firms with significant bank ownership have better operating performance overall we find that firms can reduce discrimination through holding bank ownership

the role of insider influence in mutual to stock conversions using a sample of 347 demutualizing thrifts from 1991 to 2004 we show that the level of inside participation is not a traditional signal of firm performance we conclude that unanticipated inside participation reflects the incentives of insiders to reduce the size of the offer to influence the level of expected initial public offer ipo returns we find unanticipated inside participation is related to lower offer size and higher initial returns but we do not find a relationship between inside participation and post ipo performance

equilibrium interest rates and multiperiod bonds in a partially observable economy this paper analyzes the market for financial assets in a production and exchange economy with several realized outputs and a single unobservable source of nondiversifiable risk the paper demonstrates that for a large class of diffusion outputs and preferences optimizing consumers first estimate the realizations of the unobservable factor and then use these estimates to determine portfolio and consumption rules moreover the explicit consideration of this unobservable productivity factor affects equilibrium demands and prices the equilibrium spot rate of interest emerges as the best estimate of the unobservable factor and multiperiod default free bonds arise as the optimal hedge for the unobservable changes of the stochastic investment opportunity set this paper analyzes the market for financial assets in a production and exchange economy with several realized outputs and a single unobservable source of nondiversifiable risk the paper poses and answers three questions 1 how do consumers determine equilibrium demands and prices when their investment opportunities are unobservable 2 in equilibrium what financial assets provide an optimal hedge for the

an empirical examination of models of contract choice in initial public offerings this study examines initial public offering contract choice decisions in best efforts offerings minimum sales constraints allow issuers to precommit to withdraw the offering if a fixed minimum number of shares is not sold in firm commitment offerings the over allotment option allows the underwriter to increase sales when demand is strong two theories of contract choice benveniste and spindt 1989 and ritter s 1987 extension of rock 1986 offer predictions about the role of these contract features we find that the 1977 1982 evidence is consistent with benveniste and spindt 1989 the evidence is less supportive of the ritter 1987 hypothesis that minimum sales constraints serve to reduce the winner s curse of the riskier issuers

signalling and the pricing of new issues this paper develops a signalling model with two signals two attributes and a continuum of signal levels and attribute types to explain new issue underpricing both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable intrinsic value of the firm and the variance of its cash flows many of the model s comparative statics results are novel empirically testable and consistent with the existing empirical evidence on new issues in particular the degree of underpricing which can be inferred from observable variables is positively related to the firm s post issue share price

network security and contagion abstract we develop a theoretical model of security investments in a network of interconnected agents network connections introduce the possibility of cascading failures due to an exogenous or endogenous attack depending on the profile of security investments by the agents we provide a tractable decomposition of individual payoffs into an own effect and an externality which also enables us to characterize individual investment incentives recursively by considering the network with one agent removed at a time using this decomposition we provide characterization of equilibrium and socially optimal investment levels as a function of the structure of the network highlighting the role of a new set of network centrality measures in shaping the levels of equilibrium and optimal investments when the attack location is endogenized by assuming that the attacker chooses a probability distribution over the location of the attack in order to maximize damage similar forces still operate but now because greater investment by an agent shifts the attack to other parts of the network the equilibrium may involve too much investment relative to the social optimum

stabilization syndication and pricing of ipos we argue that in the after market trading of an ipo the underwriting syndicate by standing ready to buy back shares at the offer price price stabilization compensates uninformed investors ex post for the adverse selection cost they face in bidding for ipos this domi nates ex ante compensation by underpricing the reason is that stabilization exploits ex post information about investor demand whereas underpricing must be based on ex ante infor mation however liquidity and syndication costs constrain the use of stabilization which in equilibrium generates some underpricing as well we develop a model that formalizes this intuition and generates several empirical implications

a monopolistic market for information abstract we analyze a model where traders buy information from a monopolistic seller which is subsequently used in a speculative market in order to overcome the dilution in the value of information due to its leakage through informative prices the seller of information may prefer to sell noisier versions of the information he actually has moreover to obtain higher profits it is desirable for the seller to sell different signals to different traders so that the added noise realizations do not affect equilibrium prices one way of doing so which does not require discrimination is to sell identically distributed personalized signals to each of a large number of traders

an empirical investigation of ipo returns and subsequent equity offerings abstract several recent papers present signaling models in which firms underprice their initial public offerings of equity ipos so that they can subsequently issue seasoned equity at more favorable prices we test the implications of these models we find a positive relation between ipo underpricing and the probability and size of subsequent seasoned offerings although these results are consistent with the implications of the signaling hypotheses the economic significance appears weak we conduct additional tests to evaluate other explanations for these findings and find the alternatives more compelling

ipo underpricing explanations implications from investor application and allocation schedules initial public offers ipos made on the stock exchange of singapore routinely provide sufficiently detailed data to allow reconstruction of both the application and allocation schedules we show that large investors tend to preferentially request participation in ipos with higher initial returns consistent with these investors being better informed we also show that inferences based exclusively on application strategies are quite different from those drawn on investor allocations our results suggest that caution is necessary in assessing the relative merit of competing explanations for ipo underpricing where the underlying demand is not identified

a direct test of rock s model of the pricing of unseasoned issues unique data availability and institutional arrangements for new issues in singapore allow a direct test of the empirical implications of rock s model of pricing unseasoned new issues our empirical results are consistent with the model specifically we find that the unseasoned new issues anomaly disappears when the rationing associated with new issues is incorporated into the analysis the winner s curse is evident in allocation patterns used in singapore

stock market reactions to customer and competitor orientations the case of initial public offerings recognizing that initial public offerings ipos represent the debut of private firms on the public stage this study investigates how pre ipo customer and competitor orientations ccos affect ipo outcomes building on information economics we propose that ccos influence investors sentiments toward an ipo and that both ipo specific variables which influence the credibility of cco information and facets of the organizational institutional and task environments which influence the appropriateness of cco information moderate this influence we test the framework using data collected from computer aided text analysis expert coders and secondary sources for 543 ipos across 43 industries between 2000 and 2004 a bayesian shrinkage model which accounts for industry specific effects and uses latent instrumental variables to address cco endogeneity shows that ccos positively influence ipo outcomes furthermore 1 underwriter reputation and venture funding positively moderate the effects of ccos 2 technological and market turbulence positively and institutional complexity negatively moderate the effect of customer orientation and 3 technological turbulence competitive intensity and institutional complexity positively moderate the effect of competitor orientation also accounting for endogeneity using latent instrumental variables substantially improves the predictive validity of the model relative to alternative model specifications

initial public offering underpricing the issuer s view a comment i consider the underpricing of initial public offerings ipos and the wealth transfers implicit in that underpricing i find that initial returns properly measure the issue cost effect of underpricing as a fraction of offer size as in ritter 1987 i present a measure of the wealth effect of underpricing per share retained in general the wealth effects on existing shareholders depend on the extent to which they participate in the offering from the perspective of issuer s wealth i find that dawson s 1987 measure is appropriate only in the special case in which all of the prior owners shares are sold in the ipo the finance literature contains abundant documentation of the fact that initial public offerings ipos of equity shares are underpriced on average in his review article for example smith 1986 documents numerous studies which find in the aggregate that the initial returns of ipos average about 15 ritter 1987 has recognized that the underpricing itself is a cost borne by issuing firms and he explicitly includes that cost as one of the costs of a public offering in a recent note dawson 1987 pointed out that initial returns can understate the severity of underpricing because underpricing has a dilution effect akin to that of a rights offering made at a price below market value dawson shows that the aftermarket price commonly used in calculating initial returns is lower than the aftermarket price that would have been achieved if underpricing had not occurred dawson suggests a measure which he calls issuer oriented underpricing and that measure is strictly greater than the initial return the purpose of this note is to generalize measures of underpricing by concentrating on the wealth losses incurred by issuers as a result of underpricing dawson s measure is found to hold as a special case but in general issuer wealth effects are determined by the extent to which pre issue shares prior to the ipo participate in the offering initial returns properly measure the underpricing cost as a fraction of the wealth of pre issue shareholders only under special circumstances 1 in fact initial returns can overstate the cost that flows from underpricing measured in terms of the wealth of pre issue shareholders

on aggregation of information in competitive markets the dynamic case abstract this article examines in the spirit of hellwig 1980 how a dynamic competitive security market aggregates and communicates information between various market participants at every instant it employs a continuous time economy consisting of a large number of heterogeneous agents who are endowed with noisy private signals about the risky asset payoff of differing precision it yields a stationary rational expectations equilibrium in which at every instant the agents use information contained in the market prices without rendering their private information redundant it shows that the market price reflects only that part of private information which is common to many signals and thus extends hellwig s single period results to a multi period model

forecasting the forecasts of others implications for asset pricing we develop a dynamic asset pricing model with heterogeneously informed agents unlike previous research we focus on the general case where differential information leads to the problem of forecasting the forecasts of others and to non trivial dynamics of higher order expectations in particular we prove that the model does not admit a finite number of state variables using numerical analysis we compare equilibria characterized by identical fundamentals but different information structure we demonstrate that the distribution of information has substantial impact on equilibrium prices and returns in particular we show that asymmetric information can generate momentum in returns and high trading volume

bookbuilding vs fixed price an analysis of competing strategies for marketing ipos we compare two mechanisms for selling ipos the fixed price method and american book building when investors have correlated information and can observe each other s subscription decisions in this environment the fixed price method is a strategy that can create cascading demand alternatively an underwriter building a book aggregates investor information into the offer price we find that bookbuilding generates higher expected proceeds but exposes the issuer to greater uncertainty and that it provides the option to sell additional shares that are not underpriced on the margin

price stabilization in the market for new issues abstract this study examines price stabilization in new equity issues stabilizationtruncates the distribution of post issue prices at a floor price lowering the risk of adverse price moves and hence in a competitive dealer market reducing the bid ask spread using 1 523 nasdao traded firm commitment initial public offerings issued between 1982 and 1987 we find that spreads narrow when the market price is close to the offer price and stabilization is most likely moreover significant negative returns are documented after the hypothesized termination of stabilizing activities suggesting that stabilization and its cessation affect market prices

anatomy of initial public offerings of common stock initial public offerings of common stocks ipos are typically underpriced in this paper the author develops and tests the hypothesis that underpricing serves as a form of insurance against legal liability and the associated damages to the reputations of investment bankers the empirical results based on samples of ipos that were brought to the market before and after the securities act of 1933 provide considerable support for the implicit insurance hypothesis specifically gross underpricing and market segmentation between prestigious and fringe investment bankers in originating unseasoned new issues appear to be peculiar to the post 1933 era a number of studies have documented that unseasoned common stocks typically garner large positive abnormal returns during a short period following the initial offering in his recent review of the empirical evidence on the initial returns of common stock offerings smith 36 concluded that the returns from offer price to after market price have exceeded fifteen percent his calculations did not include some of the earlier results obtained by mcdonald and fisher 23 and logue 20 when their samples are combined with those in smith s review the initial returns of unseasoned equity offerings appear even larger over seventeen percent these results imply that underwriters consistently offer the securities at substantial discounts from their values that are set in the after market in other words initial public offerings ipos appear to be underpriced what is even more puzzling is the fact that in some time periods underpricing appears to be systematically larger than in other periods ibbotson and jaffe 15 and ritter 29 have documented that during the postwar era there have been a number of periods in which the initial returns of common stocks have been extremely high ritter for example reported that the average return from the offer price to the first after market price was over forty eight percent for ipos in 1980 and 1981 1 similarly the initial returns of unseasoned issues of common stock brought to the market in 1950 1951 1961 and 1968 were unusually large these periods in which ipos were grossly underpriced are referred to as the hotissue markets why do investment bankers underprice ipos why do issuers

information sales and insider trading with long lived information fundamental information resembles in many respects a durable good hence the eects of its incorporation into stock prices depend on who is the agent controlling its flow similarly to a durable goods monopolist a monopolistic analyst selling information intertemporally competes against herself this forces her to partially relinquish control over the information flow to traders conversely an insider solves the intertemporal competition problem through vertical integration thus exerting a tighter control over the flow of information comparing market patterns i show that a dynamic market where information is provided by an analyst is thicker and more informative than one where an insider trades

allocations adverse selection and cascades in ipos evidence from the tel aviv stock exchange we examine theories of ipo underpricing using unique data from israel where the allocation to subscribers is by equal proration this enables us to simulate the return earned by uninformed investors consistent with rock s 1986 theory of adverse selection allocations were negatively related to underpricing but uninformed investors earned a negative allocation weighted initial return although the average initial return was 12 they could break even however by using publicly available information the data also supports welch s 1992 theory of information cascades demand is either extremely high or there is undersubscription with very few cases in between r 2002 published by elsevier science b v

preplay communication participation restrictions and efficiency in initial public offerings the extent to which the observed procedures for selling new issues are efficient is studied we show that a posted price mechanism in conjunction with nonbinding preplay communication and participation restrictions leads to an allocation of the security and payment that maximizes the seller s expected revenue given the informational constraints imposed by the optimizing incentives of the potential buyers article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a theory of the transition to secondary market trading of ipos abstract we develop a model in which investment banks and institutional investors collaborate in smoothing an initial public offering s ipos transition to secondary market trading their intervention promotes welfare under the assumption that significant new information arrives in the market in the immediate aftermath of the ipo under this assumption it is optimal to stage the offering and suboptimal to commit to selling shares at a uniform price the optimal strategy yields an economic rationale for secondary market price stabilization for ipos carried out via a well coordinated network of repeat institutional investors

pricing initial public offerings evidence on the pricing of initial public offerings is presented for germany a data set of 92 going publics over the years 1961 1987 is analyzed on average the initial return from the offer price to the first day of trading adjusted for market movements is more than 15 o tests of several hypotheses indicate that underpricing is related to ex ante uncertainty about the value of the shares

who benefits from secondary market price stabilization of iops abstract initial public offerings that receive secondary market price support from their underwriters are characterized by severely attenuated selling by small quantity presumably retail traders and more aggressive selling by large quantity presumably institutional traders the increase in institutional trading is concentrated in the first day of trading while the attenuation of retail trading persists this pattern exists in spite of the likelihood that retail investors receive relatively large initial allocations of fully priced stabilized offers thus the evidence is consistent with institutional investors being the primary beneficiaries of price stabilization efforts and with the use of penalty bids to constrain retail selling activity

an analysis of the implications of uncertainty and agency problems on the wealth effects to acquirers of private firms abstract extensive empirical work shows that bidders do not gain from the acquisition of publicly traded targets but experience positive excess returns in the acquisition of privately held firms this study investigates how two important differences between private and public firms namely informational uncertainty and ownership characteristics impact the returns to acquirers a sample of targets that were acquired shortly after filing for an ipo was collected to circumvent the lack of information on private firms in spite of the special characteristics of these targets the listing effect is still prevalent in this sample the results of the analysis are consistent with the hypothesis that acquirers gain in the acquisition of private firms because these targets have a relatively weaker bargaining position due to informational and agency problems and costly access to external capital markets to finance growth opportunities

pricing initial public offerings further evidence from germany abstract in a recent article in this review wasserfallen and wittleder pricing initial public offerings evidence from germany european economic review 38 1505 1517 1994 ww provide evidence of the well known underpricing phenomenon for 92 german ipos coming to market in 1961 1987 using a larger sample of 189 firms from 1970 1993 this paper i reassesses the evidence on underpricing in germany after choosing a different risk proxy to avoid potential endogeneity problems and ii provides evidence of long run ipo performance a number of new results emerge stock market returns the macroeconomic climate insider retention rates and inverse offer size all affect underpricing positively over longer horizons german ipos are poor investments losing more than twelve percent over their first three years of trading relative to the market exclusive of the initial underpricing return negative performance is heavily concentrated after the end of ww s sampling period in the post 1987 cohort

ipo mechanisms monitoring and ownership structure1 this paper analyzes the e ect of di erent ipo mechanisms on the structure of share ownership and explores the role of underpricing and rationing in determining investors shareholdings we focus on the agency problem that results when large institutions are the only investors capable of monitoring the firm whereas small shareholders free ride on these activities the major conclusion is that some well known aspects of ipos may be explained as rational responses by the issuer to the existence of regulatory constraints in public capital markets there is a two stage o ering mechanism in which the investment banker acting in the interests of the issuer optimally rations the allotment of shares to small investors in order to capture the benefits associated with better monitoring by institutions importantly in our model the existence of underpricing and oversubscription is an indication that the issuer has received a higher ex ante price than would have been obtained through a competitive walrasian type o ering process 1998 elsevier science s a all rights reserved jel classification g24 g32 g38

signalling by underpricing in the ipo market abstract empirical evidence suggests the existence of hot issue markets for initial public offerings in certain periods and in certain industries new issues are underpriced and rationing occurs this paper develops a model consistent with this observation which assumes the firm itself best knows its prospects in certain circumstances firms with the most favorable prospects find it optimal to signal their type by underpricing their initial issue of shares and investors know that only the best can recoup the cost of this signal from subsequent issues

optimal portfolio choice under incomplete information models of asset pricing generally assume that the variables which characterize the state of the economy are observable however the distributional properties of asset prices that are relevant for portfolio decisions are in general not observable and therefore must be estimated the estimation of expected returns is a particularly difficult problem and estimation errors are likely to be substantial in this light it is reasonable to examine whether the assumption of observability of expected returns and other relevant state variables causes significant mis specification in equilibrium models of asset prices this paper has three main objectives first to derive optimal estimators for the unobservable expected instantaneous returns using observations of past realized returns second to establish that estimation and portfolio choice can be solved in two separate steps third to analyze the impact of estimation error on investment choices the estimators of expected returns are in general not consistent i e the estimation error does not tend to disappear asymptotically the effects of the estimation error therefore cannot be ignored even if realized returns are observed continuously over an infinite time period

evidence on price stabilization and underpricing in early ipo returns using data on 560 firm commitment initial public offerings of common stock for the 1982 1983 period we find that the cross sectional distribution of one day returns is modeled better as a mixture of two distributions with the parameter estimates of one distribution being consistent with underpricing and the other with price stabilization further the evidence that early ipo returns are drawn from a mixture distribution persists for at least four weeks the implications of these results for the analysis of ipo returns are illustrated by examining the influence of a measure of ex ante price uncertainty on ipo pricing

underwriter price support and the ipo underpricing puzzle abstract this paper reassesses the apparent systematic underpricing of initial public offerings ipos investigation of the distribution of initial returns following ipos shows that positive mean initial returns may reflect the existence of a partially unobserved left negative tail moreover most ipos with zero one day returns subsequently fall in price suggesting that underwriter price support may account for the skewed distribution and hence the phenomenon of positive average initial ipo returns even if offering prices are set at expected market value this paper thus challenges the presumption underlying previous research that positive average initial ipo returns result primarily from deliberate underpricing

auctions vs bookbuilding and the control of underpricing in hot ipo markets market returns before the offer price is set affect the amount and variability of initial public offering ipo underpricing thus an important question is what ipo procedure is best adapted for controlling underpricing in hot versus cold market conditions the french stock market offers a unique arena for empirical research on this topic since three substantially different issuing mechanisms auctions bookbuilding and fixed price are used there using 1992 1998 data we find that the auction mechanism is associated with less underpricing and lower variance of underpricing we show that the auction procedure s ability to incorporate more information from recent market conditions into the ipo price is an important reason copyright 2003 oxford university press

why don t issuers get upset about leaving money on the table in ipos one of the puzzles regarding initial public offerings ipos is that issuers rarely get upset about leaving substantial amounts of money on the table defined as the number of shares sold times the difference between the first day closing market price and the offer price the average ipo leaves 9 1 million on the table this number is approximately twice as large as the fees paid to investment bankers and represents a substantial indirect cost to the issuing firm we present a prospect theory model that focuses on the covariance of the money left on the table and wealth changes our reasoning also provides an explanation for a second puzzling pattern much more money is left on the table following recent market rises than after market falls this results in an explanation of hot issue markets we also offer a new explanation for why ipos are underpriced copyright 2002 oxford university press

evaluating the costs of raising capital through an initial public offering abstract this article provides an empirical analysis of the costs of going public based on a sample of 1852 offerings during 1977 1987 the sample includes 1556 firm commitment issues and 296 best efforts issues three components of the cost of going public are examined 1 direct cash expenses such as legal and accounting costs 2 investment bank s commission and 3 costs resulting from the investment bank practice of pricing initial public offerings below their market values all of the cost components are significantly higher for best efforts offerings than for firm commitments in fact best efforts offerings are more than three times as expensive on a percentage basis than are firm commitments in addition there are marked economies of scale in the process of going public the total costs of going public were 40 of gross proceeds for the smallest firm commitment issues but only 15 for the largest in dollar terms we estimate that a typical small firm commitment offering of 2 5 million will cost approximately 800 000 32 of gross proceeds whereas a large issue of 25 million will cost approximately 4 million 16 of gross proceeds the issuing firm s earnings as well as the type of investment bank underwriting the issue were also important cost determinants the primary implication of our results for entrepreneurs is that it is quite expensive to attempt a public offering prematurely the marginal issuer with a small capital requirement and a poor earnings history will be at a large cost disadvantage to more established firms more specifically we advise that the firm have capital requirements of at least 10 million and positive operating income before attempting a public offering postponing a public offering until the issue will be well received by investors and investment banks is likely to be worth the wait until that time alternative sources of funds will be more cost effective

in search of complementary assets the determinants of alliance formation of high tech start ups abstract why do new technology based firms ntbfs cooperate starting from teece s teece d j 1986 profiting from technological innovation implications for integration collaboration licensing and public policy research policy 15 285 305 conceptual framework and taking advantage of subsequent literature on alliance formation in the resource and competence based tradition and in the social structure perspective we derive an empirical model that aims at highlighting the inducements and obstacles that these firms face in alliance formation according to firm specific characteristics and the nature of the alliance in particular a distinction is made between exploitative commercial alliances and explorative technological alliances the econometric estimates based on a large sample of italian young high tech firms that are observed from 1994 to 2003 provide strong evidence supporting two key intuitions of teece s work first the combination of specialized complementary assets appears to be a key driver of the formation of exploitative commercial alliances by ntbfs more specifically patent holding affects positively the likelihood to establish commercial alliances but this propensity is found to rapidly decrease with firm size suggesting that as long as ntbfs become larger and possess specialized commercial assets their urge for commercial alliances diminishes second following the parallelism set forth by teece between search for alliance partners and access to external financing the analysis indicates that potentially beneficial alliances may not take place because of the high transaction costs faced by smaller ntbfs in this respect our results clearly support the view that sponsor institutions as public research organizations venture and corporate venture capitalists may sensibly reduce these costs and that their role crucially depends on both the identity of the sponsor and the type of alliance

a simple test of baron s model of ipo underpricing abstract this paper tests baron s 1982 model of initial public offering ipo underpricing that model relies on information asymmetries between issuers and underwriters and predicts that offer prices will be lower than would prevail in the absence of asymmetric information we examine the initial public offerings of 38 investment banks that went public in the period 1970 1987 and participated in the distribution of their own securities we find that contrary to the implication of baron s model such self marketed offerings are characterized by statistically significant underpricing comparable to that of other ipos

political connections and the process of going public evidence from china abstract we examine how political connections impact the process of going public specifically we test how political connections impact the pricing of the newly offered shares the magnitude of underpricing and the fixed cost of going public based on the experience of the newly public firms from chinese security markets and using multiple measures of political connections we find robust evidence that the issuing firms with political connections reap significant preferential benefits in the process of going public to be specific we find that firms irrespective of their ownership status with greater political connections have relatively higher offering price lower underpricing and lower fixed costs during the going public process

rational expectations equilibrium with conditioning on past prices a mean variance example abstract the paper uses an intertemporal mean variance model of the market for a dividend paying risky asset to analyse rational expectations equilibria when all agents condition their expectations on past rather than current prices the main result shows that if the time span between successive market periods is short the market will approximate full informational efficiency arbitrarily closely yet the returns to being informed are bounded away from zero this contrasts with the grossman stiglitz proposition that markets cannot come close to informational efficiency if the acquisition of information is costly

evidence on the effect of claw back provisions on ipo share allocation and underpricing in hong kong abstractthe article examines share allocation practices of over 300 initial public offerings ipos in hong kong during the years immediately following the enacting of a claw back provision for ipo share reallocation the examination of exhaustive micro level data reveals that small uninformed retail investors earn higher initial returns than large investors before the enacting of the claw back provision small investors were unfavourably treated in relation to large investors the pattern now prevailing in the proportion of shares allocated to small and large investors also differs from that observed previously when attempting to isolate the determinants of ipo underpricing in hong kong the article also shows that both the informed demand hypothesis and the signalling effect of underwriters reputation are significant determinants of underpricing such result not visible when pooled ols regressions are used becomes apparent through the use of a system of simultaneous equations

strategic sophistication of individuals and teams experimental evidence many important decisions require strategic sophistication we examine experimentally whether teams act more strategically than individuals we let individuals and teams make choices in simple games and also elicit first and second order beliefs we find that teams play the nash equilibrium strategy significantly more often and their choices are more often a best response to stated first order beliefs distributional preferences make equilibrium play less likely using a mixture model the estimated probability to play strategically is 62 for teams but only 40 for individuals a model of noisy introspection reveals that teams differ from individuals in higher order beliefs

a model of the demand for investment banking advising and distribution services for new issues this paper presents a theory of the demand for investment banking advising and distribution services for the case in which the investment banker is better informed about the capital market than is the issuer and the issuer cannot observe the distribution effort expended by the banker the optimal contract under which the offer price decision is delegated to the better informed banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and the observability problem is characterized the model demonstrates a positive demand for investment banking advising and distribution services and provides an explanation of the underpricing of new issues an investment banker performs three functions which may be of value to an issuer of new securities underwriting advising and distribution this paper presents a theory of the demand for investment banking advising and distribution services based on an informational asymmetry between an issuer of new securities and an investment banker ultimately a theory of the organization of the financial intermediary industry is required that would predict which firms would use which types of financial intermediaries for which purposes and which firms would raise capital without engaging the services of a financial intermediary only a limited set of such predictions are developed here in the context of a model of a fixedprice offering under a negotiated contract in which the investment banker is

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

asset pricing in a production economy with incomplete information this paper analyzes an economy in which investors operate under partial information about technology relevant state variables it is shown that for gaussian information structures under incomplete observations the consumer s problem can be transformed into an equivalent program with a completely observed state the conditional expectation of the underlying unobservable state variables a consequence of this transformation is that classic results in finance remain valid under an appropriate reinterpretation of the state variables the static capital asset pricing model capm of sharpe 24 lintner 16 and mossin 20 states that the expected premium on any risky asset is proportional to the premium on the market as a whole this theoretical linear relationship however is subject to criticisms on two grounds first it does not seem to be supported by the empirical evidence second it is based on the premises of a constant opportunity set merton 19 subsequently relaxes this assumption and shows that when the opportunity set fluctuates over time due to changes in the state of the economy individual securities are also priced with respect to selected portfolios funds providing a hedge against unanticipated fluctuations 2 more recently breeden 3 has extended merton s results by emphasizing the role of aggregate consumption in pricing relationships in this paper we seek to further our understanding of asset pricing by relaxing the assumption that investors observe the state of the economy in the mertonbreeden framework observed state variables affect the means and variances of asset returns implying deformations of the opportunity set over time from a practical point of view it seems that this complete information assumption is violated investors in financial markets operate under partial knowledge of the microvariables which influence production and the returns on assets their decisions rely mostly on information through noisy channels such as newspapers technical reviews or weather reports in this paper we attempt to model such

multi period information markets abstract this article examines the single shot decision problem of a monopolistic information seller selling a flow of information in a dynamic framework in a generalized version of wang s 1993 economy it shows that the profit maximizing strategy of the seller is to sell his information as is but only to a fraction of traders it argues that this strategy of selling information is different from that in a static model mainly due to the very different nature of constraints faced by the information seller in a dynamic framework

litigation risk intermediation and the underpricing of initial public offerings we formally examine the role of litigation risk in initial public offering ipo pricing the underwriter s pricing decision trades off current revenue against expected future litigation costs both of which are increasing in the ipo price given a time consistency constraint and rational expectations on the part of investors however the standard litigation risk argument does not lead to equilibrium underpricing we develop a richer model that provides sufficient conditions under which there is equilibrium underpricing the issuer s choice of employing an underwriter versus floating the ipo on its own is examined and various testable implications of the model are developed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the costs of going public abstract this paper presents evidence regarding the two quantifiable components of the costs of going public direct expenses and underpricing together these costs average 21 22 of the realized market value of the securities issued for firm commitment offers and 31 87 for best efforts offers for a given size offer the direct expenses are of the same order of magnitude for both contract types but the underpricing is greater for best efforts offers an explanation of why some firms choose to use best efforts offers in spite of their apparent higher total costs is given

venture capitalist certification in initial public offerings this paper provides support for the certification role of venture capitalists in initial public offerings consistent with the certification hypothesis a comparison of venture capital backed ipos with a control sample of nonventure capital backed ipos from 1983 through 1987 matched as closely as possible by industry and offering size indicates that venture capital backing results in significantly lower initial returns and gross spreads in effect the presence of venture capitalists in the issuing firms serves to lower the total costs of going public and to maximize the net proceeds to the offering firm in addition we document that venture capitalists retain a significant portion of their holdings in the firm after the ipo the ability of third party specialists to certify the value of securities issued by relatively unknown firms in capital markets that are characterized by asymmetric information between corporate insiders and public investors has attracted much academic interest in recent years several authors including james 1990 blackwell marr and spivey 1990 and barry muscarella peavy and vetsuypens 1991 have developed and tested models based at least in part on the formal certification hypothesis presented in booth and smith 1986 a related body of work represented by deangelo 1981 beatty and ritter 1986 titman and trueman 1986 johnson and miller 1988 carter 1990 simon 1990 and carter and manaster 1990 has examined how investment bankers and auditors help resolve the asymmetric information inherent in the initial public offering ipo process in this paper we examine whether the presence of venture capitalists as investors in a firm going public can certify that the offering price of the issue reflects all available and relevant inside information we hypothesize that venture capitalists can perform this function that it will be an economically

the existence and persistence of a winner s curse new evidence from the baseball field this study takes advantage of recent developments in the measurement and valuation of individual output in the baseball labor market to i reassess prior evidence that this market is afflicted by the winner s curse phenomenon and ii test whether bidders learn to avoid this curse over time though we find no evidence of negative average returns on player contracts for the earliest cohort of baseball free agents we conclude that teams in that era failed to efficiently discount their bids in accord with available information especially about risk what is more evidence from a larger sample of players signed in the late 1990s shows that teams have continued to overvalue inconsistent free agents and failed to limit their bids to conform to players lower values in small markets this is consistent with experimental evidence that finds bounded rational behavior when bidders are faced with complex valuation problems involving multiple elements

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed