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By Michael Tan
This paper concerns applying statistical methods to investigate under-pricing in VC-backed technology Initial Public Offerings (IPOs) since the great recession. In particular, firm, market, and IPO-specific variables were explored to determine if there were any significant relationships to under-pricing. The paper focused on the Bank Preference theory of under-pricing, where under-pricing is said to occur because investment banks running IPO processes are incentivized to under-price to decrease the risk that they will not be able to allocate all the issuance to price-sensitive public markets investors.
Advisors: Professor Daniel Xu, Professor Shawn Santo, Professor Grace Kim| JEL Codes: G3, G33, G24
Auctions as an Alternative to Book Building in the IPO Process: An Examination of Underpricing for Large Firms in France
By John Mekjian
A relevant factor in determining the quality of an initial public offering (IPO) mechanism is the level and variability of underpricing that occurs. The percentage difference between the IPO price and the closing price after one day of trading is a common way to define the “underpricing” of the stock. Although companies may value a small amount of positive underpricing, they certainly want this to be controlled. Both extreme positive and extreme negative underpricing are undesirable for a company. Building off of a paper that found a lower mean and variability of underpricing for firms that use the auction IPO mechanism as opposed to the book building IPO mechanism, this paper argues that auctions are not disadvantaged when only large firms are considered. Although this paper finds that the book building mechanism controls underpricing better than the auction mechanism, the advantage disappears when considering only large firms. This analysis is relevant because, aside from two companies, only small companies have used the auction IPO mechanism in the United States. Due to the lack of auction IPOs in the United States, this paper uses French data in its analysis. By showing that large firms using the auction mechanism are not disadvantaged when compared to large firms using the book building mechanism, this paper attempts to encourage large firms in the United States to consider using the auction method for their IPOs.
Advisor: James Roberts, Marjorie McElroy | JEL Codes: G12, G14, G20, G30 | Tagged:
Taming the Dragon: The Modernization of the Chinese Equity Markets and its Effects on IPO Underpricing
By William Benesh
The extreme underpricing of Chinese Initial Public Offerings in the early days of the Chinese equity markets was reduced by several reforms instituted by the Chinese government from around 2000 to 2002. These reforms reduced 1-day returns on IPOs from 295% to 72%. The reforms reduced IPO underpricing by decreasing the inequality between IPO supply and demand. These reforms, while announced between 2000 and 2002, likely took until around 2004 to take full effect. In addition to inequality between supply and demand, other factors such as information asymmetry and government/quality signaling contributed to underpricing both before and after the reforms.
JEL Codes: G14, G15, G28, G30 | Tagged: