The Determinants of IPO Underpricing and Aftermarket Volatility

1
The Determinants of IPO Underpricing and
Aftermarket Volatility

• Presented By
• Marty Olson
• Bill Panagakos
• Leslie McMillan
• Asad KhanThomas Deczky

2
Overview

• Definition
• Hypothesis
• Data
• Methodology
• Analysis
• Implication

3
What is IPO Underpricing?

• The difference between the offer price in the
  prospectus and the first day closing price
• The difference between the first day opening
  price and the first day closing price
• Rc The TSX closing price
• Ro The TSX opening price

4
Why are IPOs Underpriced?

• Informational asymmetry between informed
  investors and uninformed investors
• S Size
• UR Underwriter Reputation
• VC Venture backed
• I Industry classification
• UoC Uses of Cash
• Mkt Bull or Bear market
• Risk
• Variance for 60 day period
• A Auditors
• Yi Year of Issue

5
What is the Hypothesis of Our Study?

• Canadian IPOs of venture backed firms experience
  less underpricing
• Canadian IPOs underwritten by more reputable
  underwriters experience less underpricing
• Canadian IPOs which experience higher
  underpricing experience greater aftermarket
  volatility

6
What Data Did We Use?

• First day returns from 1998-2000
• 52 Canadian IPOs
• 2 years of daily returns for each stock
• Daily returns of the TSX index from 1998-2003

7
What Methodology Did We Use?
OLS Regression of first day returns

• Control variables
• Year of IPO issue
• Size of firm
• Industry

• Test variables
• Venture backed
• Underwriter prestige

8
Variable Classification

• Year
• 1998-2000
• Size of Firm
• Revenue
• Market capitalization
• Industry
• Goods and services
• Energy
• Technology
• Financial

• Venture Backed
• Represented by dummy variable
• Venture backed 1
• Otherwise 0
• Underwriter Prestige
• Ranking based on Carter-Manaster ranking scores
• Values from 0-9

9
Regression Models

• General Model
• Includes all variables
• Refined Model
• Excluding insignificant variables to increase the
  overall effectiveness of the model

10
Regression Summary
11
Implications of Regression

• Underwriter prestige was found mildly significant
  when using the TSX opening price
• Venture capital was significant using the
  prospectus opening price
• Very different results based on opening price used

12
What is Volatility?

• Volatility is the rate at which the price of a
  security moves up or down.
• The aftermarket volatility is calculated as a
  variance of daily returns

13
What is the relationship between Underpricing and
Volatility?

• Average Volatility Relative is used to determine
  if IPO volatility is due to market volatility

14
Volatility Summary
15
Implication of Volatility
16
Conclusion