Associations between management forecast accuracy and pricing of IPOs in Athens Stock Exchange

This study examines the earnings forecast accuracy of newly listed companies on the Athens Stock Exchange and further investigates the relationship between earnings forecast and pricing of IPOs. It uses a unique dataset of 208 IPOs, which were floated during the period of January 1994 to December 2001 in the Athens Stock Exchange. The results suggest that investors are able to anticipate forecast errors at the time of listing. Pricing of IPOs indicate that firms with negative earnings forecast (pessimistic) are associated with low level of underpricing while optimistic management earning forecast can be a signal for high initial returns. Three variables - age of the IPOs, ownership by insiders and industry classification significantly contribute towards accuracy of earnings forecast

Evolutionary rule-based system for IPO underpricing prediction

Genetic And Evolutionary Computation Conference. Washington DC, USA, 25-29 June 2005Academic literature has documented for a long time the existence of important price gains in the first trading day of initial public offerings (IPOs).Most of the empirical analysis that has been carried out to date to explain underpricing through the offering structure is based on multiple linear regression. The alternative that we suggest is a rule-based system defined by a genetic algorithm using a Michigan approach. The system offers significant advantages in two areas, 1) a higher predictive performance, and 2) robustness to outlier patterns. The importance of the latter should be emphasized since the non-trivial task of selecting the patterns to be excluded from the training sample severely affects the results.We compare the predictions provided by the algorithm to those obtained from linear models frequently used in the IPO literature. The predictions are based on seven classic variables. The results suggest that there is a clear correlation between the selected variables and the initial return, therefore making possible to predict, to a certain extent, the closing price.This article has been financed by the Spanish founded research MCyT project TRACER, Ref: TIC2002-04498-C05-04M

Underpricing, underperformance and overreaction in initial public offerings : evidence from investor attention using online searches

Online activity of Internet users has proven very useful in modeling various phenomena across a wide range of scientific disciplines. In our study, we focus on two stylized facts or puzzles surrounding the initial public offerings (IPOs) - the underpricing and the long-term underperformance. Using the Internet searches on Google, we proxy the investor attention before and during the day of the offering to show that the high attention IPOs have different characteristics than the low attention ones. After controlling for various effects, we show that investor attention still remains a strong component of the high initial returns (the underpricing), primarily for the high sentiment periods. Moreover, we demonstrate that the investor attention partially explains the overoptimistic market reaction and thus also a part of the long-term underperformance

IPO underpricing and after-market liquidity

The underpricing of the shares sold through Initial Public Offerings (IPOs) is generally explained with asymmetric information and risk. We complement these traditional explanations with a new theory. Investors who buy IPO shares are also concerned by expected liquidity and by the uncertainty about its level when shares start trading on the after-market. The less liquid shares are expected to be, and the less predictable their liquidity is, the larger will be the amount of "money left on the table" by the issuer. We present a model that integrates such liquidity concerns within a traditional framework with adverse selection and risk. The model's predictions are supported by evidence from a sample of 337 British IPOs effected between 1998 and 2000. Using various measures of liquidity, we find that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing, after controlling for variables traditionally used to explain underpricing.liquidity, initial public offering, post-IPO market, after-market trading

Are IPOs of different VCs different?

This paper aims to analyze the impact of different types of venture capitalists on the performance of their portfolio firms around and after the IPO. We thereby investigate the hypothesis that different governance structures, objectives and track record of different types of VCs have a significant impact on their respective IPOs. We explore this hypothesis by using a data set embracing all IPOs which occurred on Germany's Neuer Markt. Our main finding is that significant differences among the different VCs exist. Firms backed by independent VCs perform significantly better two years after the IPO compared to all other IPOs and their share prices fluctuate less than those of their counterparts in this period of time. Obviously, independent VCs, which concentrated mainly on growth stocks (low book-to-market ratio) and large firms (high market value), were able to add value by leading to less post-IPO idiosyncratic risk and more return (after controlling for all other effects). On the contrary, firms backed by public VCs (being small and having a high book-to-market ratio) showed relative underperformance. Klassifikation: G10, G14, G24 . 29th January 2004

Exit timing of venture capitalists in the course of an initial public offering

We analyze the desinvestment decision of venture capitalists in the course of an IPO of their portfolio firms. The capital market learns of the project quality only in the period following the IPO. Venture capitalists with high-quality firms face a trade-off between immediately selling their stake in the venture at a price below the true value and having to wait until the true value is revealed. We show that the dilemma may be resolved via a reputation-acquiring mechanism in a repeated game set-up. Thereby, we can explain, e.g., the advent of "hot-issue market behavior" involving early disinvestments and a high degree of price uncertainty. Furthermore, we provide a new rationale for underpricing. Young venture capitalists may use underpricing as a device for credibly committing themselves to acquiring reputation

The Determinants of Management Forecasts Error and the Ipo Underpricing: a Case Study of Indonesian Ipo

To reduce the well-known information asymmetry in the IPO market, the issuing firms are required to publish offering prospectuses. One type of information disclosed in the prospectus is the management financial forecasts in which the IPO firms predict expected earnings at the end of year after the listing. The purpose of this study is to investigate the determinants of forecasted error published by the management in the IPO prospectuses. This study observes six possible determinants that affect the absolute forecast errors (AFE). Furthermore, this study also examines whether the earning forecast errors could explain the IPO stylish underpricing phenomenon.A sample of 124 IPO firms that went public in Indonesian Stock Exchange (prior Jakarta Stock Exchange) during the 1997 – 2005 period. The results show that the research models proposed are valid models. The management AFE is determined by firm size, forecast interval period, industry, and the firm business range. This study also finds that the AFE is positively related to the IPO underpricing, suggesting that the higher the forecast errors, the more underpriced is the IPO. Moreover, it is also found that market condition also influences the underpricing level in Indonesian IPO market

ON THE JOURNEY OF OVERSEAS LISTING: AN EMPIRICAL ANALYSIS ON CHINESE ENTERPRISES TO LIST ON THE HONG KONG STOCK EXCHANGE

The thesis, empirically investigates issues pertinent to the partial privatization of Chinese initial public offerings at home and abroad, especially on issues relating to Chinese enterprises‘ seeking overseas listings. Based on the asymmetric information hypotheses on initial public offerings (IPOs) and cross-border flotation literature, the proposed research includes both short-run and long-run methods, and covers the entire offering process of Chinese firms‘ going public in overseas markets. The investigation begins with an overview of Hong Kong‘s and China mainland‘s financial markets in Chapter II. The limitation of development in the domestic capital market, the desire of bringing Chinese SOEs into the international market, and the appropriate conditions in Hong Kong encourage Chinese companies to issue new shares in Hong Kong. Chapter III provides a comparative analysis on underpricing of Chinese and non-Chinese firms in Hong Kong, in order to discover the influence of asymmetric information on overseas listing and the correspondent offering strategies of Chinese companies and their underwriters. They are normally underwritten by highly reputable bankers, and the overwhelming majority of Chinese firms went public via bookbuilding when the market is on an optimal evaluation base. The average price range seems to be relatively conservative for promoting subscription demands. The potential loss can be partially mitigated by a positive price revision and carefully market timing. Chapter IV focuses on information disclosure and earnings forecasting accuracy in IPO prospectuses with their subsequent effects on aftermarket performance, since the accuracy of information becomes important in influencing IPOs offerings and after-market performance. The IPO profit forecasts errors represent a pessimistic bias on average, but it can be a crucial information resource for their investment decisions. The magnitude of forecasting errors is higher for China-related companies than local shares, indicating a higher asymmetric information level. The forecasts are not rational in the sense that managers correctly incorporate all available information, especially historical profits, in their forecasting. Also, the magnitude of forecasting errors can systematically affect the one-year trading performance. Due to the initial overvaluation, firms with higher initial returns actually underperform in the long run. And Chapter V, in order to discover the ultimate meanings and motives of such overseas listing, directly questions why and how the Chinese government takes so many many state-owned enterprises (SOEs) public in the international market. It concludes Chinese SOEs‘ overseas primary listing takes on the formidable tasks of macroeconomic partial privatization, home market protection, and domestic infantile market development. Large and ‗healthy‘ state-owned enterprises (SOEs) within the government‘s supporting industries are more likely to issue their shares on foreign, open, and well-developed stock exchanges when the target market is in good time of pricing and offering, in order to raise more capital, to operate under international standards, to send a positive signal of Chinese economic reform, and to indirectly protect the development of domestic financial market. Consequently, the partial privatization through an overseas primary listing approach is indeed a feasible way to facilitate domestic financial market growth, particularly for countries with a large economy but lack of a well-developed home capital market and a mature trading platform

Forecasting Short Run Performance of Initial Public Offerings in the Istanbul Stock Exchange

Previous research on IPOs has identified several factors or issue characteristics that play a role in the level of short term underpricing of initial public offerings. Some of those issue features are the firm size, market trend, size of the offer, investment banker reputation, method of intermediation, stock price range and investor type. The objective of this study is to develop a model based on these features to forecast the short term performance of IPOs in the Istanbul Stock Exchange. To this end we divided our sample period into a model building subperiod and a testing subperiod. After identifying 9 issue features that are related to IPO short term pricing, we estimated our models using multiple regression, multiple discriminant and logit methods. The estimated models are then tested against the IPO data in the subsequent period between 1997-2000. The overall predictive ability of the forecasting models can be described as mediocre. In terms of actual abnormal returns obtained from investment strategies based on model predictions, only the logit models beat the outcome of naive strategies, albeit only marginally

IPOs cycle and investment in high-tech industries

This paper analyses the effects of the Initial Public Offering (IPO) market on real investment decisions in emerging industries. We first propose a model of IPO timing based on divergence of opinion among investors and short-sale constraints. Using a real option approach, we show that firms are more likely to go public when the ratio of overvaluation over profits is high, that is after stock market run-ups. Because initial returns increase with the demand from optimistic investors at the time of the offer, the model provides an explanation for the observed positive causality between average initial returns and IPO volume. Second, we discuss the possibility of real overinvestment in high-tech industries. We claim that investing in the industry gives agents an option to sell the project on the stock market at an overvalued price enabling then the financing of positive NPV projects which would not be undertaken otherwise. It is shown that the IPO market can however also lead to overinvestment in new industries. Finally, we present some econometric results supporting the idea that funds committed to the financing of high-tech industries may respond positively to optimistic stock market valuations