IPO Anomalies and Stylized Facts

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IPO Anomalies and Stylized Facts

• Underpricing
• Price Stabilization
• Underwriter sells more shares than they buy
  (Aggarwal 2000).
• Strong demand? Cover short position via
  overallotment option.
• Weak demand? Cover short position via open market
  purchases.
• IPO Lockups
• Information Asymmetry (Leland and Pyle vs. Gale
  and Stiglitz)
• Moral Hazard?
• Waves (Lowery and Schwert 2003, Loughran and
  Ritter 2002)
• Long-run performance (underperformance?)
• Ritter (1991), Barber and Lyon (1997), Gompers
  and Lerner (2001)

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Partial Adjustment Phenomenon

• Hanley (1993)
• Do movements from filing range to offer price
  predict
• Underpricing?
• Changes in number of shares?

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IPO Lockups Brav and Gompers

• The commitment hypothesis yields predictions
  that differ from the signaling alternative.
  Holding constant the quality of firms, those
  that, ex-ante suffer from a greater potential for
  insiders to take advantage of shareholders would
  need longer lockups to induce investors to buy
  into the offering. This includes younger firms,
  firms with greater stock price volatility, and
  firms with characteristics such as low
  book-to-market ratios and low cash flow margins.

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Early Release

• The commitment hypothesis also has implications
  for the types of firms that investment banks will
  release from the lockup provision early.
• First, if the rate with which information is
  produced is positively related to the presence of
  venture capitalists or the quality of the
  underwriter, then we should observe early release
  associated with venture capital backing or high
  underwriter rank.

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Commitment Hypothesis and Early Release

• Second, if the firm has received a series of
  positive news announcements (proxied by a run-up
  prior to the early release) then this news, in
  turn, is likely to be associated with a reduction
  in the information asymmetry problem. Therefore
  the chance that insiders will take advantage of
  investors is lessened and insiders can be
  released from the their lockup commitments.

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The Signaling Hypothesis

• Firms that signaled their quality through longer
  lockups would be more likely to issue equity in a
  subsequent seasoned equity offering.

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Further Predictions of the Signaling Hypothesis

• Calculate for each firm, the percentage revision
  in offer price from the mid-point of the filing
  range
• Pg. 11 If high quality firms manage to
  separate themselves from low-quality firms, we
  should observe positive revisions as these
  companies are now able to obtain a higher
  offering price.

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Conditional on early release
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Patterns in volume and returns
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What explains IPO underpricing cycles?

• Ritter and Loughran
• Changing risk composition
• Realignment of incentives hypothesis/ Changing
  issuer objective functions
• Analyst lust, corruption, etc.

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Interpretation?

• Loughran and Ritter conclude (pg. 26)
• The changing risk composition hypothesis is
  relatively unsuccessful in explaining the change
  in underpricing over time.
• This approach assumes that observable
  characteristics are correlated with unobservable
  characteristics in some fixed way across time
• What should we expect?

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Conclusions

• IPO returns, IPO volume highly autocorrelated
• IPO volume and returns series are positively
  correlated with each other
• Returns lead somewhat
• Difference in early wave and late wave firms?