How Does Underwriter Price Support Affect Ipos? Empirical Evidence PDF Download

Author: Manju Puri
Publisher:
ISBN:
Category :
Languages : en
Pages : 48

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Book Description
While it is extensively documented that underwriters often quot;stabilizequot; or quot;supportquot; initial public offerings (IPOs), less is known about how this practice impacts the IPO process. We argue that price support creates a short put position for underwriters, and thereby gives underwriters the incentive to reduce the ex-ante price risk of IPOs. We provide extensive empirical evidence that price support is related to IPO price risk, using several measures of support and risk. Rare data from SEC filings on price support, cross-sectional evidence from IPOs offered between 1985 and 1994, and data from two different price support regimes all indicate a negative relation between price support and the initial price risk of IPOs.

Author: An-Sing Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 29

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Book Description
Many studies have found underpricing of initial public offerings (IPOs) and attributed the underpricing to information asymmetry either between issuers and underwriters or between informed and uninformed investors. However, by observing the distribution of initial returns on stocks after their IPOs, Ruud (1993) proposes that underpricing could result from underwriter price support. A carefully constructed database of auctioned IPOs offers a better alternative to control and thus limit the effects of information asymmetry In this study, we test and verify if the observed underpricing in auctioned IPOs can be explained by the underwriter price support hypothesis. With a carefully constructed database of auctioned IPOs, distributions of post-IPO returns are empirically analyzed. Our results indicate the existence of underwriter price support during the early post-IPO period and gradual phasing out of the support within a few weeks of trading. The empirical results also suggest that underwriters attempt to target those IPO issues whose offering prices are lower than their average auction prices. We also find that, if auctioned IPOs could be offered using the average auctioned price or are unconstrained by price ceiling limitations, then they would no longer be underpriced. These conclusions are substantiated by the outcomes of Tobit analyses in relation to possible price censoring. Finally, we perform a series of robust checks using maximum rank correlation (MRC) estimation. The findings show that information asymmetry is not a significant factor in causing the excessive abnormal returns and thus confirm the price support hypothesis.

Author: Marius Hamer
Publisher: GRIN Verlag
ISBN: 3638903699
Category : Business & Economics
Languages : en
Pages : 73

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Diploma Thesis from the year 2007 in the subject Business economics - Investment and Finance, grade: 1,3, European Business School - International University Schlo Reichartshausen Oestrich-Winkel, 80 entries in the bibliography, language: English, abstract: This paper aims at establishing a link between the average level of initial return of IPO shares, existing underpricing explanations and the dot-com bubble. In years prior to the boom of the new economy, underpricing was explained by various theories, which have extensively been developed since decades. However, in the years 1998 to 2001 IPOs were overly underpriced, leading to assumptions about behavioural aspects and investor irrationality. Analysing a comprehensive dataset of 371 IPOs on the Frankfurter B rse between 1997 and 2007, this paper aims at providing evidence that the observed lower levels of initial returns in recent years can indeed be aligned with existing theories on the basis of rational behaviour of market participants. Firstly, the IPO process and its major participants will be presented followed by a review of relevant studies on the IPO phenomenon. In the next step, established underpricing theories are recapitulated. A descriptive analysis of the data sample points out the particularities concerning the company and transaction characteristics of the sample firms. In a last step, a regression analysis relates various proxies for information asymmetry to established underpricing theories. It gives reason to believe that the irrationality at the turn of the century has vanished and that underpricing can again be explained by established theories.

Author: Raymond P.H. Fishe
Publisher:
ISBN:
Category :
Languages : en
Pages : 40

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Stock flippers pose a problem for underwriters of initial public offerings (IPOs). They subscribe to the issue, but immediately re-sell their shares, so they create an artificial demand that overstates the true demand in the market. We model how underwriters set the offer price to maximize profits in this environment. Given the underwriter's expectation of flipping activity, we find that the choice of an offer price defines whether the issue is a cold, weak, or hot IPO. A cold IPO is under subscribed; a weak IPO is over-subscribed, but flippers cause the after-market price to decrease; and a hot IPO is over-subscribed but after-market price increases. We show that flippers have the greatest effect on weak IPOs, and provide an explanation for underwriter price support activities. In contrast to existing models of price support, we show that underwriters profit from after-market purchases, particularly if the issue includes an over-allotment option. The over-allotment option causes the underwriter to choose a lower offer price, which may lead to underpricing. We also show that price support combined with the over-allotment option provides a put option to the underwriter, not the market. These results are found to be consistent with recent empirical research on IPOs and price stabilization by underwriters.

Author: George J. Papaioannou
Publisher: Academic Press
ISBN: 0128032839
Category : Business & Economics
Languages : en
Pages : 334

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Book Description
Underwriting Services and the New Issues Market integrates practice, theory and evidence from the global underwriting industry to present a comprehensive description and analysis of underwriting practices. After covering the regulation and mechanics of the underwriting process, it considers economic topics such as underwriting costs and compensation, the pricing of new issues, the stock price and operating performance of issuing firms, the evaluation of new issue decisions, and an analysis of the many choices issuers face in structuring new issues. Unlike other books, it systematically develops a critical perspective about underwriting practices, both in the U.S. and international markets, and with a level of detail unavailable elsewhere and an approach that reveals how financial institutions deliver underwriting services. Underwriting Services and the New Issues Market delivers an innovative and long overdue look at security issuance. Foreword by Frank Fabozzi - Covers underwriting contracts and arrangements on pricing and costs - Focuses on the financial consequences of the issuance decision for the firm - Describes and evaluates decisions regarding the features and structure of new security offerings.

Author: Fangjian Fu
Publisher:
ISBN:
Category :
Languages : en
Pages : 40

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Book Description
We develop a dynamic model with complete information to study IPO pricing. The model predicts tacit collusion among underwriters and endogenously generates: (1) IPO underpricing; (2) the fluctuation of IPO volume; (3) the time-variation of underpricing in hot and cold markets. In addition, the model helps to explain (1) the severe underpricing during the period of 1999-2000; (2) the highly concentrated structure of IPO underwriting market; (3) the increasing frequency of IPO syndications in recent years. We present evidence of possible collusion among underwriters and provide new empirical evidence on IPO market cycles in support of the model.

Author: Yakov Amihud
Publisher: Now Publishers Inc
ISBN: 1933019123
Category : Business & Economics
Languages : en
Pages : 109

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Book Description
Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.

Author: Chuanli Sun
Publisher:
ISBN:
Category :
Languages : en
Pages : 37

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Book Description
This paper investigates the refiling behavior (updating a new price range in later amendments before the final prospectus) in the price-setting process of initial public offerings (IPOs). 185 out of 422 IPOs in our sample (43.8%) have refiled at least once during their pricing period. We concentrate on the probability of refiling and an empirical comparison between the refiling and non-refiling IPOs. Our empirical results show that the refiling behavior is predictable at a conventional level. The refiling behavior of IPOs results in 5% greater price revisions and 7% greater initial returns although the latter effects are indirect. The determinants of price revisions for the refiling IPOs are consistent with previous literature, while those of the non-refiling IPOs exhibit considerable difference. Moreover, these empirical results support one of the potential rationales underlying the refiling behavior, i.e., refiling for information-acquisition. Limited evidence is found for the other hypotheses, such as refiling for uncertainty, quality signaling and the positive-feedback strategy. Two key implications emerge: first, the IPO pricing process is not as universal as we expect; and second, underwriters may play a different role in the IPO price-setting process for the two groups.

Author: Patrick T. Harker
Publisher: Cambridge University Press
ISBN: 9780521777674
Category : Business & Economics
Languages : en
Pages : 516

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Book Description
The efficient operation of financial intermediaries--banks, insurance and pension fund firms, government agencies and so on--is instrumental for the efficient functioning of the financial system and the fueling of the economies of the twenty-first century. But what drives the performance of these institutions in today's global environment? In this volume, world-renowned scholars bring their expertise to bear on the issues. Primary among them are the definition and measurement of efficiency of a financial institution, benchmarks of efficiency, identification of the drivers of performance and measurement of their effects on efficiency, the impact of financial innovation and information technologies on performance, the effects of process design, human resource management policies, as well as others.

Author: Zheng Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 288

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Book Description
This dissertation extends theory and empirical research on Initial Public Offerings (IPOs) to include the unique context faced by underwriters that have the flexibility to overprice cold offerings. First, it argues that underwriters have the incentive to deliberately overprice weakly-received offerings in order to avert potential withdrawal of the offerings and loss of underwriting commissions. It then empirically tests this argument and finds supporting evidence. Measuring underwriter pricing intention by the NASDAQ-adjusted percentage change from the offer price to the closing price three days prior to the end of the quiet period, it finds deliberate overpricing to be more pronounced for offerings that end up priced exactly at the lower boundary of the preliminary price range, especially when the ex ante withdrawal probability is high or when the lower boundary represents a smaller percent drop from the range's midpoint. The dissertation then examines the effect of IPO overpricing on the long-term prospects of the underwriters. It empirically demonstrates that overpricing offerings to avert withdrawal not only increases the payoff to the underwriter from the respective deals but also enhances the underwriter's share of future IPO business. In particular, it finds that banks which engage issuers with a higher ex ante propensity to withdraw, and then aggressively price the offerings to actually avert withdrawal, experience a pronounced increase in their future IPO market share. Such reward is not experienced by underwriters which at the outset avoid engaging issuers with high likelihood of withdrawal. The dissertation also finds that withdrawals have more of an adverse effect on future market share than does mere overpricing. Furthermore, when overpricing is accompanied by even a low level of price support during first-day of public trading, the effect on the bank's future market share is significantly less adverse than that associated with otherwise letting the offer be withdrawn. The dissertation extends the IPO bookbuilding theory by developing a model which encompasses the potential for IPO withdrawal, overpricing, and aftermarket price support altogether, and solving for the equilibrium offer-price-maximizing price/allocation schedule. The analysis shows that overpricing can be sustained in equilibrium in a manner that still ensures maximized proceeds to the issuer. The optimal price/allocation rule calls for allocation priority to be given to investors with strong indications of interest; underpricing to occur when premarket demand is strong; and overpricing to be resorted to only as needed to avert withdrawal by the issuer in lukewarmly-received offerings. Aftermarket price stabilization plays two roles in equilibrium: It bonds the underwriter against deliberate overpricing when premarket demand is either strong or too weak; and it adequately compensates investors when overpricing is utilized to avert issue withdrawal.