IPO’s Long-Run Performance: Hot Market versus Earnings Management

One of the IPO-related anomalies that have been well-discussed in the finance literature is the IPO’s long-running underperformance. Two of the major explanations of that phenomenon are: “Hot market” and earnings management. This study investigates the relative importance of these two explanations to the IPO’s long-run underperformance. Our results show that although both hot market and earnings management play a role in explaining IPO’s long-run performance in their own rights, earnings management no longer exhibits significant explanatory power when the IPOs are issued in the cold market. While the IPOs that are issued in the hot market still tend to underperform in the long run even if the firms do not engage in earnings management. Our findings are consistent with the literature related to the information asymmetry in IPO market. And, because the information asymmetry is more severe in hot market condition, IPOs issued in hot market tend to exhibit poorer returns than those issued in cold market.

Determinants of oversubscription of SME IPOs in India: evidence from quantile regression

PurposeThe study aims to measure the subscription level and examine the determinants of oversubscription of small and medium enterprise (SME) initial public offerings (IPOs) in India.Design/methodology/approachThe study employs cross sectional data to analyze 403 SME IPOs issued from Feb 2012 to May 2018 and listed on Bombay Stock Exchange's small and medium enterprise (BSE SME) platform and National Stock Exchange (NSE) EMERGE to investigate the determinants of oversubscription of SME IPOs. Hence, the study makes use of ordinary least square regression and quantile regression to test the hypotheses formulated for the determinants of oversubscription.FindingsThe main findings unveil that while issue price, pricing mechanism, listing delay negatively influence oversubscription; firm size, underwriter reputation, hot market and underpricing have been divulged to positively influence oversubscription. However, issue size emerged out to be significant in quantile regression at 25th, 50th and 75th quantiles.Research limitations/implicationsThe present study is confined to limited number of variables in understanding the factors impacting oversubscription. Future studies could include macroeconomic variables like gross domestic product (GDP), inflation rate, industry specific variable, i.e. technology/nontechnology industry, financial/nonfinancial industry for better understanding. Cross country analysis is suggested in future studies to validate the findings of current study. Future studies are advised to conduct the study examining the factors affecting oversubscription in light of COVID-19 pandemic.Practical implicationsThe findings of the present study offer implications to academicians, investors, investment advisors and regulators. It provides useful insights to researchers by listing the factors that contribute to variation in subscription levels in emerging economy like India thereby, paving the way for future researches in SME IPOs in countries with different institutional settings. For investors, the study provides additional and novel information useful for IPO valuation and informed investment decisions. In addition, the findings put investment advisors in better place to guide potential investors regarding investment in good quality SME stocks (i.e. highly subscribed stocks) in more informative manner. Last but not the least, as this study would assist the regulators in handling future IPOs in a way that augments the chances of success of SME IPOs.Originality/valueThis study is a novel contribution in widening the IPO literature by examining the relationship between pre-IPO firm actions like issue price, pricing mechanism, issue size, firm size, listing delay, underwriter reputation, hot market, underpricing and oversubscription in unexplored settings of Indian SME IPOs.

Post IPO dynamics of capital structure on the Johannesburg Stock Exchange

This paper examines the dynamics of capital structure for firms engaging in initial public offerings (IPOs) on the Johannesburg Stock Exchange (JSE). Censored Tobit regressions are used to model capital structure targeting behaviour. The findings suggest evidence of targeting behaviour consistent with the static trade off theory of capital structure. On average, IPO firms adjust towards the capital structure target at a faster pace than seasoned firms; IPO firms take, on average, 0.77 years to cover half the financing gap, whereas seasoned firms take an average of 2.65 years. In the first year following the IPO, hot market IPOs significantly reduce their total debt, while cold market IPOs increase the total debt significantly. In terms of the total debt ratio, hot market IPOs adjust at a marginally faster pace than cold market IPOs. However, the opposite is true when the long term debt ratio is considered. In addition, hot market IPOs adjust faster than cold market IPOs in the first year following the IPO. The average first year adjustment speed of hot market IPO firms is 45.61 percent higher than the speed of adjustment for the average cold market IPO firm.

Two consecutive hot market periods: Is the IPO market in South Africa changing over time?

Various authors, such as Gao, Ritter and Zhu (2012), Weild (2011) and Fama and French (2004) reported increasing underpricing and a dramatic decline in both the profitability and the survival rates of Initial Public Offerings (IPOs) over the last few decades internationally. This study seeks to determine whether the IPO landscape in South Africa has shown similar trends focusing on two consecutive hot market periods (1997-99 and 2006-07). The findings are, contrary to expectations, that the level of underpricing has actually improved significantly over time with very little change in the size of the listings, the offer price or the years in existence prior to listing. There is, however, a significant change in the sectors these IPOs were listed in with relatively more listings in the Alternative Board (AltX), but less emphasis in the Consumer and Technology Sectors. Although not significant, it even seems as if the success and failure rate of IPOs in South Africa has improved marginally, providing some explanation for the improvement in the level of underpricing over time. A note of caution is also mentioned regarding the use of mean MAARs as a measure of underpricing, given the typically skewness of IPO data.