Exploring the Critical Factors on the IPOirst-Day Excess Returns
Date Issued
2009
Date
2009
Author(s)
Chen, Jie-Yu
Abstract
This paper investigates the key factors which affect the initial public offering (IPO) stocks’ initial excess returns after implementing the new underwriting regulation. The Financial Supervisory Committee started to implement the new underwriting regulation in 1995. In order to make a proper offer prices for IPO stocks, the Financial Supervisory Committee canceled the price limits in the first five days after public offering, abolished former formula in calculating underwriting prices, and allowed to set offer prices by negotiations between the underwriter and the public issuer. To avoid the influence of the global financial meltdown caused by the US Subprime Mortgage Crisis, and to avoid the adaption period of implementing the new underwriting regulation, we use samples from January 2006 to December 2007.he results show that there are short-run excess returns after the IPO stocks listing, and the excess returns are obviously higher than before. The key factors which affect the excess returns most are underwriters, market economic conditions, and the industry which the issuers belong to. The underwriters with larger market shares are negatively related to companies’ initial excess returns. We speculate this is because under the new underwriting regulation, the IPO stocks’ initial excess returns will be led by the bargaining powers of the issuers and the underwriters, and the underwriters who tend to cater to the issuers, making higher offering prices, easily to have larger market shares. On the other hand, the better market economic conditions, and high-tech industry are positively related to the companies’ initial excess returns because according to “Hot Issue Market” and “Fad Hypothesis”, the investors will prefer to invest more money if the economy is better, and the investors will have more optimistic expectation of the issuers if the industry is high-tech. urthermore, according to the signaling hypothesis, we set several variables to test, such as shareholding of the boards and directors, financial performances, firm size, allotment, and industry. Within those variables, only industry is positive significant, which implies the IPO stocks’ initial excess returns are not related to the issuers’ individual characteristics.
Subjects
the new underwriting regulation
issuers
IPO
initial excess returns
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