A comparative analysis of IPO proceeds under alternative regulatory environments

Benveniste, Lawrence M.; Wilhelm, William J.

doi:10.1016/0304-405x(90)90052-2

Cited by 380 publications

(221 citation statements)

References 20 publications

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“…First, as soon will become clear in further discussion of the economic rationale for IPO underpricing, predictions emerge about the pattern of underpricing across IPOs. These predictions are derived from the theoretical models of Benveniste and Spindt (1989), Benveniste and Wilhelm (1990) and Spatt and Srivastava (1991). We design tests of these predictions and find that underpricing theories prove consistent with what we observe in the hospitality industry.…”

Section: Introductionmentioning

confidence: 63%

“…The offer price set by the underwriter must simultaneously compensate investors for accepting the risk inherent in being on the losing end of information asymmetry and raise the maximum amount of capital for the IPO firm. This rationale is the basis of the theoretical models developed by Benveniste and Spindt (1989), Wilhelm (1990) and, Spatt andSrivastava (1991), and it suggests that it is this balancing act that is the impetus to IPO underpricing.…”

Section: Economic Rationale For Underpricingmentioning

confidence: 99%

“…The theoretical work of Benveniste and Spindt (1989), Benveniste and Wilhelm (1990) and Spatt and Srivastava (1991) posits that underpricing serves to motivate investors to reveal truthful indications of interest. The simple intuition is that by allowing investors to receive a positive return by setting the offer price below the true price, one can induce investors to participate in the bookbuilding process.…”

Section: Economic Rationale For Underpricingmentioning

confidence: 99%

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IPO Underpricing in the Hospitality Industry: A Necessary Evil?

Canina

Chang

Gibson

2008

The Journal of Hospitality Financial Management

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Hospitality initial public offerings (IPOs) experienced average first-day price increases of 17.1% between January 1981 and December 2001. This price increase, referred to as IPO underpricing, represents a substantial opportunity cost to the owners of the issuing firm. IPO underpricing is a critical consideration for managers of private hospitality firms who are considering going public. The increased liquidity, easier access to equity capital, and other benefits that accrue to publicly traded firms must be carefully weighed against the significant cost of underpricing. This paper explains the relationship between the marketing process of IPOs and the degree of underpricing. We test the hypothesis that underpricing is a reward for the information revealed by regular investors during the marketing process of the IPO. We explain why underpricing is a necessity for managers of private hospitality firms if they choose to go public. For managers of private hospitality firms who are considering taking their firms public, our results provide an historical benchmark for the underpricing that they can expect to transfer to outside investors which is different from that of the overall market. Beyond benchmarking the cost of going public, we test theories that predict underpricing and investigate the use of share allocations as an incentive for truth telling.JEL: G24, G32

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Section: Introductionmentioning

confidence: 63%

Section: Economic Rationale For Underpricingmentioning

confidence: 99%

Section: Economic Rationale For Underpricingmentioning

confidence: 99%

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IPO Underpricing in the Hospitality Industry: A Necessary Evil?

Canina

Chang

Gibson

2008

The Journal of Hospitality Financial Management

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“…These offerings are designated with the dummy variable BB placings: In this setting, retail investors no longer provide the fallback in bargaining with institutional investors envisioned by Benveniste and Wilhelm (1990). For example, suppose the underwriter had reason to believe that investors were deliberately understating their demand in hopes of forcing a lower price.…”

Section: Price Discovery In Primary Marketsmentioning

confidence: 99%

IPO Allocations: Discriminatory or Discretionary?

2001

Self Cite

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We estimate the structural links between IPO allocations, pre-market information production, and initial underpricing and find that (1) allocation policies favor institutional investors, both in the US and worldwide; (2) increasing institutional allocations results in offer prices that deviate more from the pre-marketing price range; (3) constraints on bankers' discretion reduce institutional allocations and result in smaller price revisions, indicating diminished information production; and (4) initial returns are directly related to information production and inversely related to institutional allocations. Our results indicate that discretionary allocations promote price discovery in the IPO market and reduce indirect issuance costs for IPO firms. r 2002 Elsevier Science B.V. All rights reserved.JEL classification: G32; G15; G24 Keywords: Initial public offerings; Bookbuilding; Underpricing; Intermediation; Allocation policy $ We are especially grateful to the referee for detailed comments that substantially improved the paper. We also thank Francesca Cornelli, William Greene, Michel Habib, Maureen O'Hara, Jay Ritter, G. William Schwert (the editor), and participants at the NYSE 'Global Equity Markets in Transition' conference (Hawaii, 2001), the American Finance Association meetings (Atlanta, 2002), the Third Toulouse Finance Workshop, and seminars at Cambridge University, Johann-Wolfgang-von-Goethe Universit. at Frankfurt, the University of North Carolina at Chapel Hill, Oxford University, the University of Virginia, and the University of Wisconsin-Madison for helpful comments. We wish to thank the many companies, banks, and bourses that made data available. All errors are our own.

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“…The offer price can lie outside the indicative price range and indeed sometimes 9 The incentive problem of truthfully eliciting investors' information was first discussed in Benveniste and Spindt (1989) and Benveniste and Wilhelm (1990).does. The final prospectus (which contains the definitive offer price) is released at this point.…”

mentioning

confidence: 99%

How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing

Bartling

Park

2008

SSRN Journal

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When a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment option. This option is a standard feature of initial public offering (IPO) arrangements that allows the underwriter to purchase more shares from the issuer at the original offer price. We propose a theoretical model to study the implications of this combination of short position and overallotment option on the pricing of the IPO. Maximizing the sum of both the profits from their share of the offer revenue and the potential profits from aftermarket trading, we show that underwriters strategically distort the offer price. This results either in exacerbated underpricing when favorably informed underwriters lower prices to secure a signaling benefit, or in informationally inefficient offer prices when underwriters pool in offer prices irrespective of their information.

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A comparative analysis of IPO proceeds under alternative regulatory environments

Cited by 380 publications

References 20 publications

IPO Underpricing in the Hospitality Industry: A Necessary Evil?

IPO Underpricing in the Hospitality Industry: A Necessary Evil?

IPO Allocations: Discriminatory or Discretionary?

How Syndicate Short Sales Affect the Informational Efficiency of IPO Prices and Underpricing

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