II- Data Description:
The sample consists of American Initial
Public Offerings underpriced in the first day of trading for 2006 and 2007. The
years 2008 and 2009 have not been included in the sample due to lack of
available information. The data base includes 348 offerings, after excluding
the issues having an underpricing less than 5%, the sample is reduced to 225
IPOs, and I require the firms to be available in the U.S Securities and
Exchange Commission website because I use the SEC database for the company
filings and prospectuses which further reduce the sample to 217 IPOs.
My primary data source for the IPOs is
http://www.iposcoop.com database. I have collected the missing
information from prospectuses available in the SEC's Electronic Data Gathering
and Retrieval (EDGAR) system for IPOs (final prospectuses are identified on
EDGAR as document 424B at
http://www.sec.gov), and from a number
of other sources.
Underwriter rankings are on a 0 to 9 scale.
Information comes from the Jay Ritter website, a file presenting the rankings
of all underwriters from 1980-2007. All the rankings in this file are integers
followed by a 0.1 (1.1 up to 9.1). Loughran and Ritter attach a 0.1 to all
rankings so that other researchers can easily distinguish between their
rankings and those from Carter and Manaster and Carter, Dark, and Singh, which
never end with a 0.1. Because Loughran and Ritter to make this underwriter
rankings' file start with the Carter and Manaster (1990) and Carter et al.
(1998) rankings, but with some changes, and they make their own methodology to
complete rankings for the other years.
To measure the Overhang Ratio, Pre-IPO shares
retained are calculated as the difference between shares post offer and shares
offered to the public. Information on shares post offer come from the
prospectuses and completed from:
http://biz.yahoo.com/ipo and
http://moneycentral.hoovers.com
.
Issuing firm age is calculated as Ln (1+age) and age
is the difference between the founding year and the issue year. Information on
founding year comes from Jay Ritter website, a file presenting founding years
for firms from 1975 to 2008.
Information on expected net proceeds to measure the issue
size, on ownership structure (insiders' ownership, institutional
ownership, blockholders ownership) and on financial data in the year prior to
going public (assets, sales, net income, EBITDA) to measure the different
proxies of risk and on R&D expenditures come from the final
prospectuses of issuing firms.
If a firm has zero sales, I assign a sales value of 1 thousand
$, since in my empirical work I use logarithms, and the logarithm of zero is
undefined.
R&D intensity is calculated as the ratio of
R&D expenditures (a year prior to offering) to the expected market value.
To calculate the expected market value of an IPO, I use the offer price
multiplied by the post-issue number of shares outstanding.
For sales and R&D expenditures, if I am not sure whether
they are zero or are missing, I treat the value as missing.
Unfortunately, missing values on R&D expenditures
(underwriter reputation for 6 firms and sales for 4 firms) reduce the sample to
117 observations. Trying to eliminate R&D intensity as an explanatory
variable to increase the number of observations has deteriorated the model, so
R&D intensity is a fundamental explanatory variable to underpricing
phenomenon.
Information on Venture Capital backed comes from
prospectuses.
Issue risk is a dummy variable taking the value of
one if the issue is operating in a technological risky sector and zero
otherwise. I use the same method of Loughran and Ritter (2004) to categorize
IPOs as a technology firm or not.
Tech stocks are defined as those with SIC codes:
3571, 3572, 3575, 3576, 3577, 3578 (computer
hardware)
3661, 3663, 3669 (communications equipment)
3671, 3672, 3674, 3675, 3677, 3678, 3679 (electronics)
3812 (navigation equipment)
3823, 3825, 3826, 3827, 3829 (measuring and controlling
devices)
3841, 3845 (medical instruments)
4812, 4813 (telephone equipment)
4899 (communications services)
7370, 7371, 7372, 7373, 7374, 7375, 7378, and 7379
(software).
The two sentiment indicators used in this model:
individual investor sentiment and institutional investor
sentiment are available on a weekly basis that are compiled from surveys
by the American Association of Individual Investors and Investors
Intelligence.
If I want to look at the true relationship between
underpricing and sentiment, for an IPO at the week t, I should work
with the sentiment indicator of the week t-1 because it more
accurately reflects the investor sentiment for the week t, but since
there is a time lag of 1 week between responses and reporting (as I presented
earlier the procedure of reporting these indicators), I should actually work
with the sentiment of the same week t to overcome this reporting
lag.
Time dummy: a dummy variable taking the value of 1 if
the IPO date is after July 2007, and zero otherwise. This variable is used to
control the beginning of financial crisis period and its impact on
underpricing.
Table 2 provides descriptive statistics of the full sample:
The overall mean underpricing of the sample (117 observations) 29.54%, the
overall mean for overhang ratio is 9.706, 0.022 for R&D intensity, the
overall mean firm age of the sample is approximately 11 years (10 years and 10
months). The overall means of firm profitability and ROA are negative and the
overall mean of insiders' ownership is 55.48%. The overall means of investors
bullish bearish ratios (individuals and institutionals) are higher than 1,
which indicates that individual and institutional investors in this period and
for this sample are rather optimistic than pessimistic.
|
Table 2. Descriptive Statistics of the Full
Sample
|
|
The sample size is 217, R&D expenditures is missing for 90
firms, Underwriter ranking is missing for 6 firms and sales is missing for 4
firms, reducing the number of observations to 117. The dependent variable
is the percentage first-day return from the offer price to the first-day
closing price. The underwriter reputation dummy takes a value of one if the
lead underwriter has an updated Carter and Manaster (1990) rank of 8 or more,
and zero otherwise. Share overhang is the ratio of retained shares to the
public float (the number of shares issued). R&D intensity is the ratio of
Pre-IPO R&D expenditures to the expected market value.
|
|
The VC dummy takes a value of one (zero otherwise) if the IPO
is backed by venture capital. Ln(1 + age) is the natural log of 1 plus the
years since the firm's founding date as of the IPO. The Ln(assets) is the
natural logarithm of the pre-issue book value of assets expressed in millions
$. Ln(sales) is the natural log of the firm sales a year prior the offering,
expressed in millions $. Firm profitability is the ratio of Pre-IPO EBITDA to
total assets value.
|
|
ROA is the ratio of Pre-IPO net income to total assets value.
The issue risk is a tech dummy takes a value of one (zero otherwise) if the
firm is in the technology business. Insiders' ownership and blockholders'
ownership are proxies to ownership structure and issuer bargaining power. AAII
and II bullish bearish Ratios are the % of bullish investors divided by the %
of bearish investors. Time dummy takes a value of one (zero otherwise) if the
IPO occurred after July 2007.
|
|
|
|
|
|
|
|
|
|
|
|
Mean
|
Median
|
Max
|
Min
|
Std Dev
|
Skewness
|
Kurtosis
|
Jarque-Bera
|
Probability
|
|
UNDERPRICING
|
0,295
|
0,219
|
1,254
|
0,055
|
0,235
|
1,408
|
4,831
|
55,027
|
0,000
|
|
UNDERWRITER REPUTATION
|
0,846
|
1,000
|
1,000
|
0,000
|
0,362
|
-1,919
|
4,682
|
85,584
|
0,000
|
|
OVERHANG RATIO
|
9,706
|
3,412
|
399,289
|
0,000
|
38,750
|
8,993
|
89,246
|
37839,240
|
0,000
|
|
R D INTENSITY
|
0,022
|
0,015
|
0,145
|
0,000
|
0,025
|
2,096
|
8,566
|
236,685
|
0,000
|
|
VC BACKED DUMMY
|
0,726
|
1,000
|
1,000
|
0,000
|
0,448
|
-1,016
|
2,033
|
24,699
|
0,000
|
|
FIRM AGE
|
2,475
|
2,303
|
4,905
|
0,000
|
0,871
|
0,612
|
3,988
|
12,057
|
0,002
|
|
FIRM SIZE LN ASSETS
|
4,300
|
3,985
|
8,640
|
0,272
|
1,506
|
0,900
|
3,788
|
18,828
|
0,000
|
|
FIRM SIZE LN SALES
|
3,473
|
3,859
|
9,225
|
-6,908
|
2,827
|
-2,051
|
8,830
|
247,683
|
0,000
|
|
FIRM PROFITABILITY
|
-0,064
|
0,053
|
2,062
|
-3,527
|
0,509
|
-2,448
|
22,255
|
1924,288
|
0,000
|
|
ROA
|
-0,068
|
-0,001
|
3,648
|
-1,279
|
0,497
|
3,222
|
28,728
|
3429,200
|
0,000
|
|
ISSUE RISK TECH DUMMY
|
0,556
|
1,000
|
1,000
|
0,000
|
0,499
|
-0,224
|
1,050
|
19,512
|
0,000
|
|
INSIDERS OWNERSHIP
|
0,555
|
0,599
|
1,000
|
0,000
|
0,269
|
-0,440
|
2,320
|
6,029
|
0,049
|
|
BLOCKHOLDERS OWNERSHIP
|
0,694
|
0,731
|
2,091
|
0,000
|
0,342
|
0,784
|
5,861
|
51,888
|
0,000
|
|
AAII BULL BEAR RATIO
|
1,263
|
1,219
|
2,148
|
0,491
|
0,416
|
0,325
|
2,401
|
3,812
|
0,149
|
|
INVI BULL BEAR RATIO
|
2,169
|
2,260
|
3,212
|
1,223
|
0,518
|
-0,171
|
1,865
|
6,852
|
0,033
|
|
TIME DUMMY
|
0,248
|
0,000
|
1,000
|
0,000
|
0,434
|
1,168
|
2,364
|
28,570
|
0,000
|
From the Jarque-Bera test, we can deduce that the dependant
variable and all the explanatory variables are not normally distributed except
for individual investors sentiment (p.value = 0.1486).
I classified the sample into two subsamples: firms with low
underpricing (=sample median 21.85% (59 obs)) and firms with high underpricing
(>sample median (58 obs)). (Descriptive statistics of the two subsamples are
in tables 3 and 4)
For firms with high underpricing, I notice that the means of
overhang ratio, R&D intensity and insiders' ownership are lower than those
of low underpricing, but the mean of AAII bullish bearish ratio is higher:
these remarks indicate that underpricing increases monotonically with higher
individual investors' sentiment and decreases with higher firm quality and
higher issuer bargaining power.
Table 5 indicates that firms with highest underpricing at the
1st day of trading are almost risky firms (young firms with small
assets and sales and operating in a technological sector). From the underwriter
prestige segmentation, I remark that almost firms look for hiring prestigious
underwriters and these firms have the highest underpricing degree. Higher
issuer bargaining power leads to lower underpricing.
|
Table 3. Descriptive Statistics of Firms with Low
Underpricing
|
|
Firms with low underpricing are firms with underpricing
less than the median of the full sample 21.85%.
|
|
|
|
|
|
|
|
|
|
|
|
Mean
|
Median
|
Max
|
Min
|
Std Dev
|
Skewness
|
Kurtosis
|
Jarque-Bera
|
Probability
|
|
UNDERPRICING
|
0,125
|
0,125
|
0,219
|
0,055
|
0,047
|
0,124
|
1,942
|
2,902
|
0,234
|
|
UNDERWRITER REPUTATION
|
0,814
|
1,000
|
1,000
|
0,000
|
0,393
|
-1,610
|
3,593
|
26,360
|
0,000
|
|
OVERHANG RATIO
|
14,228
|
2,895
|
399,289
|
0,160
|
54,189
|
6,352
|
44,887
|
4709,997
|
0,000
|
|
R D INTENSITY
|
0,028
|
0,022
|
0,145
|
0,000
|
0,029
|
1,743
|
6,773
|
64,893
|
0,000
|
|
VC BACKED DUMMY
|
0,712
|
1,000
|
1,000
|
0,000
|
0,457
|
-0,936
|
1,875
|
11,717
|
0,003
|
|
FIRM AGE
|
2,458
|
2,303
|
4,868
|
0,693
|
0,878
|
0,746
|
3,898
|
7,455
|
0,024
|
|
FIRM SIZE LN ASSETS
|
4,510
|
4,144
|
8,640
|
0,272
|
1,719
|
0,412
|
2,832
|
1,735
|
0,420
|
|
FIRM SIZE LN SALES
|
3,172
|
3,832
|
8,961
|
-6,908
|
3,436
|
-1,574
|
5,758
|
43,048
|
0,000
|
|
FIRM PROFITABILITY
|
-0,147
|
0,015
|
0,604
|
-3,527
|
0,589
|
-3,506
|
19,713
|
807,607
|
0,000
|
|
ROA
|
-0,076
|
-0,008
|
3,648
|
-1,279
|
0,623
|
3,309
|
23,149
|
1105,687
|
0,000
|
|
ISSUE RISK TECH DUMMY
|
0,576
|
1,000
|
1,000
|
0,000
|
0,498
|
-0,309
|
1,095
|
9,856
|
0,007
|
|
INSIDERS OWNERSHIP
|
0,603
|
0,649
|
1,000
|
0,000
|
0,268
|
-0,644
|
2,833
|
4,150
|
0,126
|
|
BLOCKHOLDERS OWNERSHIP
|
0,736
|
0,729
|
2,091
|
0,000
|
0,389
|
1,131
|
5,682
|
30,269
|
0,000
|
|
AAII BULL BEAR RATIO
|
1,229
|
1,216
|
2,087
|
0,537
|
0,403
|
0,394
|
2,446
|
2,277
|
0,320
|
|
INVI BULL BEAR RATIO
|
2,174
|
2,123
|
3,212
|
1,223
|
0,518
|
-0,271
|
2,022
|
3,074
|
0,215
|
|
TIME DUMMY
|
0,153
|
0,000
|
1,000
|
0,000
|
0,363
|
1,933
|
4,736
|
44,138
|
0,000
|
|
Table 4. Descriptive Statistics of Firms with High
Underpricing
|
|
Firms with high underpricing are firms with
underpricing more than the median of the full sample 21.85%.
|
|
|
|
|
|
|
|
|
|
|
|
Mean
|
Median
|
Max
|
Min
|
Std Dev
|
Skewness
|
Kurtosis
|
Jarque-Bera
|
Probability
|
|
UNDERPRICING
|
0,468
|
0,412
|
1,254
|
0,221
|
0,223
|
1,107
|
4,198
|
15,324
|
0,000
|
|
UNDERWRITER REPUTATION
|
0,879
|
1,000
|
1,000
|
0,000
|
0,329
|
-2,329
|
6,423
|
80,737
|
0,000
|
|
OVERHANG RATIO
|
5,105
|
3,843
|
30,441
|
0,000
|
5,007
|
3,356
|
15,321
|
475,732
|
0,000
|
|
R D INTENSITY
|
0,016
|
0,011
|
0,109
|
0,000
|
0,020
|
2,489
|
10,947
|
212,535
|
0,000
|
|
VC BACKED DUMMY
|
0,741
|
1,000
|
1,000
|
0,000
|
0,442
|
-1,102
|
2,216
|
13,237
|
0,001
|
|
FIRM AGE
|
2,492
|
2,303
|
4,905
|
0,000
|
0,871
|
0,474
|
4,106
|
5,126
|
0,077
|
|
FIRM SIZE LN ASSETS
|
4,086
|
3,812
|
8,553
|
2,323
|
1,231
|
1,727
|
6,334
|
55,706
|
0,000
|
|
FIRM SIZE LN SALES
|
3,778
|
3,874
|
9,225
|
-6,908
|
2,015
|
-2,756
|
17,031
|
549,203
|
0,000
|
|
FIRM PROFITABILITY
|
0,021
|
0,064
|
2,062
|
-1,026
|
0,400
|
1,819
|
13,611
|
304,105
|
0,000
|
|
ROA
|
-0,059
|
0,024
|
1,143
|
-1,095
|
0,328
|
0,016
|
6,215
|
24,986
|
0,000
|
|
ISSUE RISK TECH DUMMY
|
0,534
|
1,000
|
1,000
|
0,000
|
0,503
|
-0,138
|
1,019
|
9,668
|
0,008
|
|
INSIDERS OWNERSHIP
|
0,506
|
0,548
|
0,914
|
0,000
|
0,262
|
-0,290
|
1,953
|
3,463
|
0,177
|
|
BLOCKHOLDERS OWNERSHIP
|
0,651
|
0,746
|
1,095
|
0,000
|
0,282
|
-0,593
|
2,329
|
4,481
|
0,106
|
|
AAII BULL BEAR RATIO
|
1,297
|
1,265
|
2,148
|
0,491
|
0,430
|
0,244
|
2,359
|
1,567
|
0,457
|
|
INVI BULL BEAR RATIO
|
2,164
|
2,260
|
3,212
|
1,282
|
0,522
|
-0,072
|
1,717
|
4,027
|
0,133
|
|
TIME DUMMY
|
0,345
|
0,000
|
1,000
|
0,000
|
0,479
|
0,653
|
1,426
|
10,106
|
0,006
|
|
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
|
|
Data are from iposcoop, Securities and Exchange Commissions
data and other sources; the sample size is 217, R&D expenditures is missing
for 90 firms, Underwriter ranking is missing for 6 firms and sales is missing
for 4 firms. High prestige underwriters are those with a ranking of 8 or higher
on 0-9 scale. Low share overhang IPOs have an overhang ratio of 3.412 (median)
or lower. Firms with low R&D intensity are those with R&D intensity
lower than 1.5% (median). Firms with 0-7 years old are classified as young.
Firms with 12 months pre-IPO assets less than $53.8 million are classified as
small. Firms with 12 months pre-IPO sales less than $47.4 million are
classified as low sales firms. Firms with insiders' ownership less than 59.88%
(median) are classified as firms with low bargaining power.
|
|
Segmented by
|
Average 1st day return
|
N
|
|
|
Underwriter prestige
|
|
|
|
|
Low prestige
|
17.59%
|
39
|
|
|
High prestige
|
27.77%
|
164
|
|
|
Share Overhang
|
|
|
|
|
Low
|
20.53%
|
130
|
|
|
High
|
31.93%
|
87
|
|
|
R&D intensity
|
|
|
|
|
Low
|
35.02%
|
63
|
|
|
High
|
21.74%
|
64
|
|
|
Venture Capital backing
|
|
|
|
|
Non VC backed
|
20.70%
|
95
|
|
|
VC backed
|
28.53%
|
122
|
|
|
Age
|
|
|
|
|
Young ( 0-7 years old )
|
25.98%
|
68
|
|
|
Old ( 8 years and older )
|
24.7%
|
149
|
|
|
Assets
|
|
|
|
|
Small
|
31.18%
|
72
|
|
|
Large
|
22.08%
|
145
|
|
|
Sales
|
|
|
|
|
Small
|
28.21%
|
76
|
|
|
Large
|
23.97%
|
135
|
|
|
Firm Profitability
|
|
|
|
|
<0
|
24.88%
|
67
|
|
|
>=0
|
25.20%
|
150
|
|
|
Industry
|
|
|
|
|
Non Technology
|
23.50%
|
145
|
|
|
Technology
|
28.33%
|
72
|
|
|
Bargaining power
|
|
|
|
|
Low bargaining power
|
26.23%
|
107
|
|
|
High bargaining power
|
24%
|
110
|
|
|
Individual Investors' sentiment
|
|
|
|
|
Pessimistic sentiment
|
25.07%
|
162
|
|
|
Optimistic sentiment
|
25.21%
|
55
|
|
|
Time
|
|
|
|
|
Before crisis period
|
22.57%
|
168
|
|
|
After crisis period
|
33.80%
|
49
|
|
|
ALL
|
25.10%
|
217
|
|
|
|
