I-2\ The explanatory variables:
In this paragraph, I try to justify the use
of these determinants and explanatory variables in the model for each theory
and to present briefly the previous results reached by researchers that used
the same indicators and control variables in their models.
I-2-1\ Informational Asymmetry Theory:
* The theory of signalling: Firm quality
The issuer is the most and best informed party about the
issuing firm quality. There are many proxies of firm quality that can be
employed . I introduce the most important ones often used by researchers:
Ø The Overhang ratio = Pre-IPO shares retained by
insiders/Public Float
The percentage ownership retained by insiders serves as a
signal for firm quality, and two different relations are observed between firm
quality and underpricing with two different explanations. The first relation is
that, for high overhang ratio and so for high quality issues, the issue price
is lower a mean to demonstrate their quality and to distinguish themselves from
the pool of low quality issuers, then a higher level of underpricing is
observed. In the same direction, we can justify the use of overhang ratio and
its importance to underpricing phenomenon by the fact that only the shares sold
to the public in the IPO are undervalued. The shares retained by insiders are
valued at market. Thus, for a given degree of underpricing, the economic cost
per retained share (the dilution) declines as overhang rises. Because the cost
of underpricing to the issuer declines as overhang rises, it is natural to
conjecture that firms with greater overhang will have greater underpricing and
we find the same positive relation between overhang ratio and underpricing.
The second relation is completely different in that issuing
firm quality is negatively correlated with underpricing. Issuers with high
quality firms bargain for higher offer prices for their IPOs and then a lower
degree of underpricing is observed at the first day of trading.
Ø The R&D intensity = Pre-IPO R&D
expenditures/expected market value after IPO
R&D expenditures are the intangible investment most
extensively researched in economics, accounting and finance, they have to be
disclosed in the corporate financial reports. R&D contributes to
information asymmetry and Guo, Lev and Shi (2006) consider R&D activities
as the major source of asymmetry. Pre-IPO R&D intensity of the issuer is
strongly and positively related to the first day underpricing.
R&D-intensive firms are often undervalued by investors. That is why R&D
intensive issuers can not set a high offer price for their IPO. Besides, they
are more willing to forgo money on the IPO table than are no R&D issuers,
because they expect to recoup money left on the table by subsequent issues of
seasoned stocks when the market realizes over time the positive outcomes of
their R&D. So the relation between R&D intensity and underpricing is
positive but many studies find no relation between underpricing and SEO, which
refute the last point of recouping money left on the table by SEO in the
future.
Another relation can be found between R&D intensity and
underpricing, mainly since no relation between underpricing and SEO: R&D
intensive issuers believing in the high quality of their firms and in the
importance of their R&D and its positive outcomes in the recent future
require high offer prices for their IPOs which induces a negative relation
between R&D intensity and underpricing.
Ø Venture Capital backed: a dummy variable taking the
value of one if the issue firm is backed by a venture capital and zero
otherwise.
Since venture capitalists have expertise in particular
industries, they are expected to make superior investments relative to other
investors. In essence, VCs certify the quality of an IPO and their presence
signals that asymmetric information is relatively low for this issue and that
the issuing firm quality is high. So, issuers can bargain for a high offer
price which declines underpricing. Another explanation is found, that VC backed
firms face larger underpricing, since high quality issuers will continue
demonstrating the firm quality by throwing money on the IPO table and not
requiring high issue prices. However, in many studies using the venture capital
as a determinant of firm quality, this variable is found insignificant. A
question may arise: «Is Venture Capital backing really a signal of firm
quality and an explanatory variable to underpricing anomaly?». I introduce
this variable in the model to verify these results.
Ø Underwriter Reputation: a dummy variable taking the
value of one if the lead underwriter has a rank = 8 (zero otherwise).
Some issuers use it as a signal of high quality and want to
hire a prestigious underwriter, since by agreeing to be associated with an
offering, prestigious intermediaries «certify» the quality of the
issue. When an issuer chooses a prestigious underwriter for the book-building
mechanism, he sets a low offer price conducting a high underpricing on one
hand, as compensation to the underwriter and on the other hand, he is sure
about full subscription, he is concerned by quantity rather than price and a
lower offering price increases the probability of full subscription. Then,
there is a positive relation between underwriter reputation and
underpricing.
But, there is another explanation completely different: when
an issuer chooses a prestigious underwriter who certifies the high quality of
the issue, he can bargain for a higher offer price and then a lower level of
underpricing is observed: A negative relation between underwriter reputation
and underpricing.
| 
