A Model of Factors Affecting Underpricing in IPOs Focusing Accounting Information Role

Document Type : Research Paper

Authors

1 Ph.D. of Accounting, Faculty of Management, Department of Accounting, University of Tehran, Tehran, Iran.

2 Associate Professor, Faculty of Management, Department of Accounting, University of Tehran, Tehran, Iran.

Abstract

Numerous studies in different capital markets show that stock prices in initial public offerings change after a very short time, resulting in significant and unusual returns, which are referred to as underpricing of initial public offerings. Considering that previous studies, which are mainly based on the theory of information asymmetry and behavioral biases, have considered various and sometimes contradictory reasons as the cause of this phenomenon. This study aims to provide a comprehensive model of the factors explaining this abnormal return. Also, the role of accounting information in explaining this phenomenon is investigated.
To discover these factors, the researcher studies the subject literature extensively, uses the qualitative method of theme analysis and interviews experts to extract their opinions. Then extracting repetitive patterns among the opinions and classifying them, the researcher develops a comprehensive model of factors affecting stock price in initial public offerings.
In the model presented in this research, four factors of shortcomings of the initial supply process, fundamental factors, behavioral aspects and information content in the initial public offerings lead to underpricing in such a way that by intervening of regulatory bodies in the supply and demand mechanism, pricing errors occur and fundamental factors are not reflected in offering prices. Investors' behavioral aspects and insufficient accounting information content intensify this matter.
According to the research findings, those shareholders who analyze the available information, especially accounting information, can gain abnormal returns. Also, the need to provide prospective accounting information in an initial public offering to determine the real share price leads to an increase in accounting information content.

Keywords

References

باقرزاده، سعید, نیک بخت، محمدرضا, نوروش، ایرج. (1390). پژوهش های مدیریت در ایران., دوره  15 , شماره  1 (پیاپی 70).
دستگیر، محسن. علیخانی بوانی، مهدی. (۱۳۸۵). "عرضه اولیه سهام: پدیده ارزان فروشی سهام  و فرضیات مرتبط با آن". ماهنامه بورس ، شماره ۵۸.
ازکیا، مصطفی. دربان‌آستانه، علیرضا. (1382). روش‌های کاربردی تحقیق، جلد اول، انتشارات کیهان، چاپ اول.
افشار، ابراهیم. (1392). مبانی پژوهش کیفی: فنون و مراحل تولید نظریه زمینه‌ای، نشر نی، چاپ سوم.
Afshar, E. 2013. Fundamentals of Qualitative research: Methods and Steps in developing grounded theory. Nashre-Ney. 3rd edition (In Persian)
Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of financial Economics, 17(2), 223-249.
Azkia, M. 2003. Applied Research Methods. Keyhan Press. 1st edition (In Persian)
Bagherzadeh, S. Nikbakht, M. And I. Noravesh. 2011. Management researchs in Iran. 15(1):70 (In Persian)
Baron, D. P. (1982). A model of the demand for investment banking advising and distribution services for new issues. The journal of finance, 37(4), 955-976.
Beatty, R. P. (1989). Auditor reputation and the pricing of initial public offerings. Accounting Review, 693-709.
Beatty, R. P., & Ritter, J. R. (1986). Investment banking, reputation, and the underpricing of initial public offerings. Journal of financial economics, 15(1-2), 213-232.
Bertoni, F., & Giudici, G. (2014). The strategic reallocation of IPO shares. Journal of Banking & Finance, 39, 211-222.
Bertoni, F., & Giudici, G. (2014). The strategic reallocation of IPO shares. Journal of Banking & Finance, 39, 211-222.
Boreiko, D., & Lombardo, S. (2011). Italian IPOs: Allocations and claw back clauses. Journal of International Financial Markets, Institutions and Money, 21(1), 127-143.
Boulton, T. J., Smart, S. B., & Zutter, C. J. (2011). Earnings quality and international IPO underpricing. The Accounting Review, 86(2), 483-505.
Cai, N., Ramchand, L., & Warga, A. (2004). The pricing of equity IPOs that follow public debt offerings. Financial Management, 5-26.
Chan, K., Wang, J., & Wei, K. J. (2004). Underpricing and long-term performance of IPOs in China. Journal of Corporate Finance, 10(3), 409-430.
Chan, Y. C. (2010). Retail trading and IPO returns in the aftermarket. Financial Management, 39(4), 1475-1495.
Chuluun, T. (2015). The role of underwriter peer networks in IPOs. Journal of Banking & Finance, 51, 62-78.
Dastgir, M. And M. Alikhani. 2006. Initial Public offering: Underpricing Phenomenon and related hypotheses. Bourse Publications. 58  (In Persian)
Derrien, F., & Womack, K. L. (2003). Auctions vs. bookbuilding and the control of underpricing in hot IPO markets. The Review of Financial Studies, 16(1), 31-61.
Duarte-Silva, T. (2010). The market for certification by external parties: Evidence from underwriting and banking relationships. Journal of Financial Economics, 98(3), 568-582.
Fernando, C. S., Gatchev, V. A., May, A. D., & Megginson, W. L. (2012). The benefits of underwriter reputation to banks and equity issuing firms. The Journal of Finance, 67, 233-270.
Goldstein, M. A., Irvine, P., & Puckett, A. (2011). Purchasing IPOs with commissions. Journal of Financial and Quantitative Analysis, 1193-1225.
Harris, O. (2018). The impact of industrial districts on the pricing of IPOs. The Quarterly Review of Economics and Finance, 69, 274-285.
Ibbotson, R. G., & Ritter, J. R. (1995). Initial public offerings. Handbooks in operations research and management science, 9, 993-10
Jamaani, F., & Alidarous, M. (2019). Review of Theoretical Explanations of IPO Underpricing. Journal of Accounting, Business and Finance Research, 6(1), 1-18.
Jenkinson, T., Jones, H., & Suntheim, F. (2018). Quid pro quo? What factors influence IPO allocations to investors?. The Journal of Finance, 73(5), 2303-2341.
Jeon, B., Lee, J., & Choi, J. (2013). Design and implementation of a wearable ECG system. International Journal of Smart Home, 7(2), 61-69.
Kaneko, T., & Pettway, R. H. (2003). Auctions versus book building of Japanese IPOs. Pacific-Basin Finance Journal, 11(4), 439-462.
Loughran, T., & Ritter, J. R. (2002). Why don’t issuers get upset about leaving money on the table in IPOs?. The Review of Financial Studies, 15(2), 413-444.
Loughran, T., Ritter, J. R., & Rydqvist, K. (1994). Initial public offerings: International insights. Pacific-Basin Finance Journal, 2(2-3), 165-199.
Lowry, M., Michaely, R., & Volkova, E. (2018, June). Information revelation through regulatory process: Interactions between the SEC and companies ahead of the IPO. In Fifth Annual Conference on Financial Market Regulation.
Lyn, E. O., & Zychowicz, E. J. (2003). The performance of new equity offerings in Hungary and Poland. Global Finance Journal, 14(2), 181-195.
Nielsson, U., & Wójcik, D. (2016). Proximity and IPO underpricing. Journal of Corporate Finance, 38, 92-105.
Ritter, J. R. (1984). Signaling and the valuation of unseasoned new issues: A comment. The Journal of Finance, 39(4), 1231-1237.
Ritter, J. R. (1998). Initial public offerings. Contemporary finance digest, 2(1), 5-30.
Ritter, J. R., & Welch, I. (2002). A review of IPO activity, pricing, and allocations. The journal of Finance, 57(4), 1795-1828.
Rock, K. (1986). Why new issues are underpriced. Journal of financial economics, 15(1-2), 187-212.
Schrand, C., & Verrecchia, R. E. (2004). Disclosure choice and cost of capital: evidence from underpricing in initial public offerings. Unpublished working paper. University of Pennsylvania.
Scott, W. R. (2009). Financial accounting theory. Toronto, Ont: Pearson Prentice Hall.
Sherman, A. E. (2005). Global trends in IPO methods: Book building versus auctions with endogenous entry. Journal of Financial Economics, 78(3), 615-649.
Shi-yu, X., & Chang, L. (2008). The degree of IPO underpricing in China. Journal of Modern Accounting and Auditing, 4(4), 32.
Su, D., & Fleisher, B. M. (1999). An empirical investigation of underpricing in Chinese IPOs. Pacific-Basin Finance Journal, 7(2), 173-202.
Tinic, S. M. (1988). Anatomy of initial public offerings of common stock. The Journal of Finance, 43(4), 789-822.
Trueman, B., & Titman, S. (1988). An explanation for accounting income smoothing. Journal of accounting research, 127-139.
Wang, W., & Yung, C. (2011). IPO information aggregation and underwriter quality. Review of Finance, 15(2), 301-325.
Welch, I. (1989). Seasoned offerings, imitation costs, and the underpricing of initial public offerings. The Journal of Finance, 44(2), 421-449.
 
 
 

Files

History

  • Receive Date: 12 August 2020
  • Revise Date: 09 September 2021
  • Accept Date: 26 October 2021

Share

How to cite

Statistics