The Seven Percent Solution

Chen, Hsuan‐Chi; Ritter, Jay R.

doi:10.1111/0022-1082.00242

Cited by 664 publications

(476 citation statements)

References 29 publications

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“…Following Hermalin and Katz (1991) for example, rather than model the extensive form bargaining game, we simply assume that bargaining results in a split of the proceeds between the firm and the underwriter, with a fraction β being captured by the firm and the remaining 1 − β by the underwriter. 9 This assumption is reasonable in the context of this paper given the evidence in Chen and Ritter (2000) of remarkably constant underwriter spreads.…”

Section: Overviewmentioning

confidence: 83%

Good IPOs Draw in Bad: Inelastic Banking Capacity and Hot Markets

2007

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We posit that screening IPOs requires specialized labor which, in the short run, is in fixed supply. Hence, a sudden increase in demand for IPO financing increases the compensation of IPO screening labor. Increased compensation results in reduced screening which encourages sub-marginal firms to enter the IPO market, further increasing the demand for screening labor and thus its compensation. The model's conclusions are consistent with empirical findings of increased underpricing during hot markets, positive correlation between issue volume and underpricing, negative correlation between issue volume and information production, and with tipping points between hot and cold markets characterized by discontinuous jumps in volume, underpricing, and issue quality. Finally, the model makes sharp and so far untested predictions relating IPO market conditions both to the fundamental values of IPO firms and to the returns to investment banks and investment banking labor.JEL Classification Codes: G20, G24; Keywords: IPO, underpricing, labor constraint † We wish to thank Walid Busaba, Mike Fishman, Jie Gan, Jon Garfinkel, Anand Goel, Vidhan Goyal, Gerard Hoberg, Yrjo Koskinen, Erik Lie, Ji-Chai Lin, Tim Loughran, Allen Michel, Jacob Oded, Gordon Phillips, Thomas Rietz, Harley "Chip" Ryan, Jay Sa-Aadu, Paul Schultz, Ann Sherman, Mark Taranto, Xianming Zhou, seminar participants at Baruch College, Boston University, DePaul University, Louisiana State University, MIT, Michigan State University, Notre Dame University, University of Iowa, University of Maryland, University of Michigan, University of Minnesota and the University of Western Ontario, as well as the discussant and participants at the 2005 City University of Hong Kong Corporate Finance and Governance Conference for their valuable comments and suggestions. Special thanks are extended to the Editor, Matthew Spiegel, and two anonymous reviewers for very detailed and insightful comments. The second author, Thomas Noe, would also like to acknowledge the generous support and assistance of the Sloan School at MIT, where he was a visiting scholar during the period in which much of the work on the manuscript was completed. All remaining errors are ours.

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Section: Overviewmentioning

confidence: 83%

Good IPOs Draw in Bad: Inelastic Banking Capacity and Hot Markets

2007

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“…On average U.S. banks charge 5% in international IPOs marketed to U.S. investors -the category of offering in our sample that is perhaps closest to a domestic U.S. IPO. This certainly appears considerably lower than the average 7% spread most medium-sized U.S. IPOs pay [see Chen and Ritter (2000)]. However, international IPOs led by U.S. banks are not medium-sized: the average issue size is US$465.5 million.…”

Section: How Expensive Are Us Banks?mentioning

confidence: 99%

Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors

Ljungqvist

Jenkinson

Wilhelm

2003

Review of Financial Studies

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We examine the costs and benefits of the global integration of primary equity markets associated with the parallel diffusion of U.S. underwriting methods. We analyze both direct and indirect costs (associated with underpricing) using a unique dataset of 2,132 IPOs by non-U.S. issuers from 65 countries in 1992-1999. Bookbuilding typically costs twice as much as a fixed-price offer, but on its own, does not lead to lower underpricing. However, when conducted by U.S. banks and/or targeted at U.S. investors, bookbuilding can reduce underpricing significantly, relative to fixed-price offerings or bookbuilding efforts conducted by 'local' banks. These results are obtained after allowing for the endogeneity and interdependence of issuers' choices. For the great majority of issuers, the gains associated with lower underpricing outweighed the additional costs associated with hiring U.S. banks or marketing in the U.S. This suggests a quality/price trade-off contrasting with the findings of Chen and Ritter [Journal of Finance 55, 2000], particularly since non-U.S. issuers raising US$20m-80m also typically pay a 7% spread when U.S. banks and investors are involved. Global Integration in Primary Equity Markets:The Role of U.S. Banks and U.S. Investors AbstractWe examine the costs and benefits of the global integration of primary equity markets associated with the

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“…IPO Cost is calculated as the IPO spread divided by the share overhang, which is defined as the ratio of shares retained by non-selling shareholders to shares sold in an IPO, following Chen and Ritter (2000). The arguments in Hsieh, Lyandres and Zhdanov (2007) suggest that firms with high IPO Cost will engage in M&A sooner than firms with low IPO Cost.…”

Section: Variables Related To Ex-ante Uncertainty Resolutionmentioning

confidence: 99%

Going public to acquire? The acquisition motive in IPOs

Çelikyurt

Sevilir

Shivdasani

2010

Journal of Financial Economics

220

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Newly public firms make acquisitions at a torrid pace. Their large acquisition appetite reflects the concentration of IPOs in M&A intensive industries, but acquisitions by IPO firms also outpace those by mature firms in the same industry. IPO firms' acquisition activity is fueled by the initial capital infusion at the IPO and through the creation of an acquisition currency that is used to raise capital for both cash and stock financed acquisitions along with debt issuance subsequent to the IPO. IPO firms play a bigger role in the M&A process by participating as acquirers than they do as takeover targets and acquisitions are at least as important as R&D and CAPEX for their growth. The pattern of acquisition activity following an IPO is important in explaining the evolution of ownership structure of newly public firms. JEL Codes: G32, G34Address Correspondence to Anil Shivdasani * We thank Uli Hege, Chris James, Michelle Lowry, Henri Servaes, and participants at the 2008 AFA meetings, the RICAFE Conference, the ESSEC Private Equity Conference, the 2007 Jackson Hole Finance Conference, and at University of North Carolina for helpful comments. 2 IntroductionWhy do firms choose to go public? An IPO is one of the most consequential events in the life of a company, but our understanding of this decision remains incomplete. Existing theories offer several insights for why firms decide to go public. In theory, an IPO creates liquidity for the firm's shares, provides an infusion of capital to fund growth, allows insiders to cash out, provides cheaper and ongoing access to capital, facilitates the sale of the company, gives founders the ability to diversify their risk, allows venture capitalists and other early stage investors to exit their investment, and increases the transparency of the firm by subjecting it to capital market discipline. Weisbach (2008) show that financing of capital expenditures and the desire to benefit from potential overvaluation are motives for seasoned equity offerings (SEOs) and IPOs.We study a relatively unexplored motive for IPOs -the desire to make acquisitions. We conduct a number of tests to provide some insight on the determinants of post-IPO M&A activity. Our first observation is that the M&A activity of IPO firms is strongly linked to the amount of M&A activity within their industry. In other words, IPOs tend to occur in industries with high M&Aactivity. Yet, industry clustering of IPOs and M&A does not fully explain the acquisition appetite of IPO firms -by most benchmarks, IPO firms are more prolific acquirers than the mature public firms within their industry.We consider three potential avenues by which an IPO can facilitate future M&A activity and explore whether these explain the acquisition volumes by IPO firms. An IPO can allow companies to pursue M&A by providing an infusion of cash, by opening the possibility of paying for an acquisition with overvalued stock, and by resolving the uncertainty about the pre-IPO valuation of the firm and the 1 In other work, Brown, Dittmar...

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The Seven Percent Solution

Cited by 664 publications

References 29 publications

Good IPOs Draw in Bad: Inelastic Banking Capacity and Hot Markets

Good IPOs Draw in Bad: Inelastic Banking Capacity and Hot Markets

Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors

Going public to acquire? The acquisition motive in IPOs

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