IPOs and SEOs, real investments, and market timing: Emerging market evidence

Abstract

This paper uses market-to-book ratio decomposition to examine whether firms that issue equity through initial public offerings or seasoned equity offerings exploit mispricing because of investor enthusiasm or to finance growth opportunities. We find strong evidence that, on average, firms do not issue mispriced stocks to exploit investors but, rather, to finance their investment opportunities in the form of real assets, inventory, and capital expenses. Firms that issue overvalued stocks with the view to increase their cash holdings experience poor long-run performance. Overall, our results show that stock mispricing drives equity offerings through IPOs and SEOs. Nonetheless, high transparency and balanced regulation in the marketplace deter issuing firms from investing their proceeds in non-valuecreating activities. This evidence is robust to alternative measures of valuation and long-run performance.

Pengaruh Besaran Initial Return Terhadap Performa Jangka Panjang Saham Perusahaan

“…Menurut De Bondt dan Thaler (1987) yang meneliti mengenai market behavior dari investor, terjadi overreaction di capital market, terutama pada saat banyak terjadi peristiwa keuangan di suatu negara atau di dunia. Market overreaction tidak hanya terjadi pada peristiwa seperti IPO (Ritter, 1991), atau SEO (Wadhwa et al, 2016), namun juga ketika terdapat informasi baru yang beredar di publik mengenai suatu saham atau perusahaan. Market overreaction sendiri berarti fenomena saat investor cenderung memiliki reaksi berlebihan pada peristiwa atau informasi baru yang tidak terduga dan lebih memprioritaskan informasi tersebut dalam pengambilan keputusan daripada melihat data historis atau data yang selama ini telah ada.…”

A Review of IPO Under-pricing Phenomenon in Asia

“…The second part of the review deals with the literature which investigated such issues, where most of the literature regarding such issues was related to the Chinese IPOs. From the literature (Moshirian et al, 2010;Liu et al, 2014;Espenlaub et al, 2016;Wadhwa et al, 2016;, we find that the level of under pricing is higher in countries with lenient regulatory environments and lower in countries with tighter regulations and higher transparency.…”

“…Finally, they reported that IPOs in countries with legal institutions originating in the UK common law system have nearly 40% longer survival times than those with civil law systems. Wadhwa et al (2016) included all IPOs and seasoned equity offerings (SEOs) listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange from 1991 (the year of financial deregulation) to 2012. They examined whether equity issues through IPOs or SEOs were due to mispricing or growth opportunities.…”

Artificial Neural Network to Model Managerial Timing Decision: Non-linear Evidence of Deviation from Target Leverage

“…In addition, the value of Pdf_Folio:1282 a firm has been proven to be highly dependent on operating at optimal levels as well as equity market timing decisions by managers which impact decision-making [13]. However, the opposing situation is also evidenced in the literature where firms issuing during times of high equity valuations are driven by intentions to invest in real assets [14]. Thus, the findings from predictive model would also allow improved inferences to decision-making at investor and managerial levels.…”