The pricing of underwriting services in the Australian capital market

Recent media releases have placed enormous strains on the credibility of the underwriting industry. It has been alleged that underwriters in the US and UK collude and fix underwriting fees. In contrast to recent evidence on underwriter spreads in the US (Chen, H.-C., Ritter, J.R., 2000. The seven percent solution. Journal of Finance, in press.), we find that Australian underwriting fees are not clustered at one particular percentage. Using 282 underwritten industrial IPOs from 1980 to 1996, we find that underwriters systematically price their services according to firm-specific variables such as the offer size, the subscription period of the issue, the retained ownership after the IPO, the offer price, and whether options form part of the underwriter's compensation.</p

The Impact of Forecast Disclosure and Accuracy on Equity Pricing:The IPO Perspective

In a relatively less litigious environment like Australia, it is common to find IPO firms that voluntarily provide forecasts in their prospectus. Using 158 Australian industrial IPOs listed from 1991 to 1997, we examine the impact of the disclosure and accuracy of earnings and dividend forecasts on equity pricing. Our results show that IPO firms’ disclosure policy is not related to their initial and long-run valuation. However, the market appears to price managers’ ability to forecast: firms with inaccurate earnings and dividend forecasts, especially those that fall short of their forecasts, experience adverse price reactions surrounding the day when the actual figures are released. Our results also show a significant relationship between forecast errors and IPO firms’ postlisting performance. Further analysis shows that this relationship is driven mainly by the announcement effect.</p