Underpricing, risk management, hot issue and crowding out effects : evidence from the Australian resources sector initial public offerings

The main purpose of this paper is to explore the role of risk management, speculative industry competition effect and hot issue markets. We used a sample of 260 initial public offerings (IPOs) in the Australian resource sector for the 1994–2004 period to test the underpricing effect. We do not find any evidence that risk management can reduce the uncertainty relating to the new issue and hence alleviate the extent of underpricing. A plausible explanation for this lack of evidence is the poor information content of publicly available disclosures regarding risk management activities of IPO firms. We further provide evidence that the underpricing returns for resources IPOs are not impacted upon by the strength of alternative speculative IPO markets. We also show that the degree of underpricing adjusts to both market return in the preceding three months and the average underpricing of resources IPOs in the 12 month period leading to the float which offers an explanation to the hot issue effect observed in the IPO market.

The pricing of infrastructure initial public offerings : evidence from Australia

This paper explores first-day returns on infrastructure entity initial public offerings (IPOs) in Australia from 1996 to 2007. While a good deal has been written on the first-day returns of industrial and mining company IPOs and Real Estate Investment Trust IPOs, first-day returns of infrastructure entity IPOs have yet to be reported in the literature. The study uses ordinary least squares regression analysis to identify factors that might influence the percentage first-day returns theoretically available to investing subscribers and factors that might influence the aggregate amount of money left to subscribers by issuers. The study finds that first-day returns, on average, are not significantly different from zero. There is evidence, however, that suggests higher dividend yields and higher percentage direct costs of capital raising influence these first-day returns. The study also finds that infrastructure entity IPOs that seek to raise more equity capital leave less money on the table for subscribing investors.

Initial public offerings of energy companies

This study analyses 158 energy company initial public offerings (IPOs) in Australia from January 1994 to December 2010, including the period of the global financial crisis (GFC). The study finds that energy company IPOs had an average 22.0 % underpricing and that those IPOs that sought to raise more equity capital and engaged underwriters had lower underpricing. There is also evidence that suggests energy company IPOs that offered options to their underwriters had higher underpricing returns, effectively cancelling the lower underpricing effect of the underwriting itself. The energy IPOs that raised equity capital after the 2007/8 global financial crisis do not appear to have offered on average, significantly different underpricing returns to their investors compared to those energy IPOs that raised capital prior to this GFC period. The findings of this study offer insights for issuers who seek to lower underpricing, for underwriters involved in the capital raising and for investors who are looking to invest in Australian energy company IPOs.

Managing news coverage around initial public offerings

We examine opportunistic behavior of initial public offering (IPO) firms in Taiwan where they are required to disclose their own earnings forecasts and are unrestricted in releasing news around the offerings. We find that prior to the offerings, IPO firms tend to report higher earnings, disclose inflated earnings forecasts, and manage more good news. News management, however, emerges as the most predominant factor in aftermarket stock prices. In particular, IPO firms have a strong preference for releasing good news related to strategy/policy that may simply provide a vision of a firm's future. Furthermore, the news releases are often forward-looking when they are positive about the firms but tend to be realized when they are negative. IPO firms also tend to engage in more window dressing activities before a larger sale of IPO shares from existing shareholders or a larger decline in insiders' holdings. Our analysis shows that managerial optimism cannot fully account for their behavior.

Long-run performance of initial public offerings: The evidence for Switzerland

We estimate the underpricing and long-run performance of Swiss initial public offerings (IPOs) from 1983 to 2000. The average market adjusted initial return is 34.97%. To examine the long-run performance of Swiss IPOs, we compute buy-and-hold abnormal returns, skewness-adjusted wealth ratios, and cumulative abnormal returns using 120 months of secondary market returns. In contrast to previous findings for the U.S. and Germany, we do not find strong evidence for a distinct IPO effect. We attribute long-run underperformance to the fact that IPO firms tend to be small firms. It virtually vanishes when we use a small capitalization index as a benchmark. In spite of distinct economic implications and statistical properties, our basic results are similar for all performance measures applied.

Impact of the Corporate Law Economic Reform Program Act 1999 on initial public offering prospectus earnings forecasts

Commencing 13 March 2000, the Corporate Law Economic Reform Program Act 1999 (Cth) introduced changes to the regulation of corporate fundraising in Australia. In particular, it effected a reduction in the litigation risk associated with initial public offering prospectus disclosure.We find that the change is associated with a reduction in forecast frequency and an increase in forecast value relevance, but not with forecast error or bias. These results confirm previous findings that changes in litigation risk affect the level but not the quality of disclosure. They also suggest that the reforms’ objectives of reducing fundraising costs while improving investor protection, have been achieved.

Impact of the Corporate Law Economic Reform Program Act 1999 on initial public offering prospectus earnings forecasts

Commencing 13 March 2000, the Corporate Law Economic Reform Program Act 1999 (Cth) introduced changes to the regulation of corporate fundraising in Australia. In particular, it effected a reduction in the litigation risk associated with initial public offering prospectus disclosure. We find that the change is associated with a reduction in forecast frequency and an increase in forecast value relevance, but not with forecast error or bias. These results confirm previous findings that changes in litigation risk affect the level but not the quality of disclosure. They also suggest that the reforms' objectives of reducing fundraising costs while improving investor protection, have been achieved.