List of tables
Table 1. Average first day returns of some studies
................................................14
Table 2. Descriptive Statistics of the Full Sample
................................................65
Table 3. Descriptive Statistics of Firms with Low Underpricing
..............................67
Table 4. Descriptive Statistics of Firms with High
Underpricing ..............................68
Table 5. Average First-day Returns Categorized by Underwriter
prestige, Share Overhang, R&D Intensity, VC Backing, Age, Assets, Sales,
Firm profitability, Industry, Bargaining Power, Individual Investors' sentiment
and Time ................................................69
Table 6. Ordinary Least Squares Regression Results (with
Bullish proportion as investors' sentiment measure)
....................................................................................71
Table 7. Ordinary Least Squares Regression Results (with
Bullish Bearish Spread as investors' sentiment measure)
..................................................................72
Table 8. Ordinary Least Squares Regression Results
.......................................76
Abstract
U
nderpricing phenomenon has intrigued academics and
practitioners over the past three decades, and has generated considerable
research trying to clarify and to understand this short run puzzle: asymmetric
information theories, IPO market efficiency theories and behavioral and
sentiment approach. In this study, I regroup in the same model the most
important explanations advanced earlier to determine which of these
explanations characterizes best the data in the context of a unified framework,
with a contribution in the behavioral approach. I use a direct measure of
investors' sentiment obtained from the survey data of AAII and II, and I
distinguish between the sentiments of the two types of investors: individual
and institutional investors.
Sentiment is a primary driver of underpricing and a relevant
explanation to this anomaly. Moreover, individual investors are those driving
the first day closing prices and are more conducting the short run IPO puzzle
than the institutional investors.
INTRODUCTION
G
oing public constitutes a real driver for the development of a
company, enabling it to increase its equity capital and to overcome the
constraint that its founders are no longer able to provide the capital needed
for its expansion, and enabling it to diversify its sources of financing
without the need for debt. It is also a way to provide liquidity by creating an
opportunity to convert all or some founders and shareholders' wealth into cash
immediately or at a future date. Going public is also an opportunity to clarify
the company's business and strategy and to think about the company's future
growth. Not forgetting the role of going public and being listed in enhancing
the company's credibility and strengthening its image and reputation. When a
company decides to go public, shares offered in the stock market should be
correctly and truly valued. Issuers should also time the Initial Public
Offering to coincide with a favourable period (Hot market) to succeed their
first introduction in the market. But the question is, if the issuing firm's
managers are shrewd enough to value the company's shares and to choose a hot
market period, why underpricing is a persistent anomaly characterizing the IPO
market and why so much money is leaving on the IPO table?
Stoll and Curley (1970), Logue (1973), Reilly (1973) and
Ibbotson (1975), are the first who documented that when companies go public,
the first day closing price is systematically higher than the issue price at
which the public offering was introduced in the market. They are the first who
documented the first day underpricing phenomenon. And Ibbotson (1975) is the
first who offered a list of possible explanations for underpricing, many of
which were formally explored by other authors in later work.
The underpricing phenomenon has inspired a large theoretical
literature over decades trying to give a relevant and a convincing explanation
to this first day anomaly. It has intrigued academics and practitioners over
the past three decades and has generated considerable research trying to
clarify and to understand this phenomenon. The first explanations that were
advanced are based on the informational asymmetry between the key parties of an
IPO: issuing firm, underwriter and investors. These theories have been very
popular among academics and practitioners for decades and have been considered
as the most relevant and convincing explanation to the short run IPO anomaly.
However, other theories have been introduced asserting the informational
transparency and lucidity and the IPO market efficiency, since the first
theories based on asymmetric information are unlikely to give a relevant
explanation to the surprisingly and severe level of underpricing of 63.5%
reached in 1999 and 2000. This severe level of the internet boom years exceeded
any level previously seen. Researches are continuing, and it is fair to say
that this anomaly is not satisfactorily resolved. It is still a puzzle, since
nor the informational asymmetry theories neither the IPO market efficiency
theories are likely to give a convincing and a reliable explanation to this
short run IPO phenomenon.
Many researchers come to the conclusion that IPO future
researches should turn to behavioral approach and sentiment notion. Research
effort should focus more on behavioral explanations to clarify and to explain
the short run IPO behaviour and the underpricing anomaly: a new path trying to
understand and to explain this persistent anomaly. Turning to behavioral
explanations seems to be the most promising area of research to understand the
short run IPO behaviour.
We can say that the underpricing anomaly may be the most
controversial area of IPO research. Research effort has provided numerous
analytical advances and empirical insights, but underpricing is not yet
explained and the research effort is continuing.
In this thesis, I answer these two main problematics:
Ø What are the most relevant and reliable
explanations to the underpricing anomaly from the long list of explanations
advanced?
Ø If we rely on behavioral explanations based on
investors' sentiment to explain this phenomenon, what type of investors is more
conducting the underpricing phenomenon and the first day returns?
To answer these two main questions, I present in a first
section the phenomenon and its persistence in time, for all the countries and
for all the industries. I present the two main categories of explanations:
informational asymmetry and theories asserting the informational transparency
and the IPO market efficiency. I summarize the most important findings and
results of researchers that have considered these theories in their studies. In
a second section, I present the most important studies and papers that have
considered the sentiment explanation and the investors' behaviour as the most
convincing and relevant driver and determinant of IPO underpricing. In this
section, I give an idea about the application of the behavioral and sentiment
approach to clarify and to understand the IPO patterns by numerous researchers
and I shed light on the importance of the sentiment investors in the IPO
market.
Finally, in the third section, I regroup the most important
explanations that have been advanced in the same model to determine which of
these explanations characterizes best a sample of 217 U.S IPOs for 2006 and
2007. In the context of a unified framework and model, I present the three
theories: asymmetric, symmetric and behavioral approach.
For the behavioral approach, I use direct measures of
sentiment obtained from the survey data of American Association of
Individual Investors and Investors Intelligence. I distinguish
between the sentiments of the two types of investors: individual and
institutional investors, to answer the second question.
The main result is that sentiment is a primary driver of
underpricing and a relevant explanation to this short run anomaly. Moreover,
individual investors are those driving the first day closing prices and are
more conducting the short run IPO puzzle than the institutional investors.
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