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Offering methods and issuer-oriented underpricing costs: Evidence from the Hong Kong IPO market

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  • Mazouz, Khelifa
  • Saadouni, Brahim
  • Yin, Shuxing

Abstract

We extend Leung and Menyah's (2006) study by relating the estimation of the issuer-oriented underpricing costs to the IPO offering methods. We distinguish between the oversubscription rates of institutional and retail investors in the estimation of the issuer-oriented underpricing costs associated with the pure fixed price, fixed price and bookbuilding IPOs. Leung and Menyah show that the issuer underpricing cost of new share issues (UN) averages about 14% of the headline underpricing. This average drops to about 7% after accounting for the interest income from application funds (RAF). In this study, we show that the mean of UN is about 16% (11%) of the headline underpricing before (after) accounting for the RAF. We report also evidence that the UN and the RAF depend on the IPO offering method. The UN of the pure fixed price, fixed price and bookbuilding IPOs represent 15.60%, 4.61% and 18.07% of the headline underpricing, respectively. These averages fall to 12.54%, -4.17% and 16.67% after accounting for the RAF. Our conclusions are robust across different time periods.

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  • Mazouz, Khelifa & Saadouni, Brahim & Yin, Shuxing, 2009. "Offering methods and issuer-oriented underpricing costs: Evidence from the Hong Kong IPO market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(5), pages 937-949, December.
    • Handle: RePEc:eee:intfin:v:19:y:2009:i:5:p:937-949
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    References listed on IDEAS

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    1. Ljungqvist, Alexander P. & Wilhelm, William Jr., 2002. "IPO allocations: discriminatory or discretionary?," Journal of Financial Economics, Elsevier, vol. 65(2), pages 167-201, August.
    2. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1995. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, vol. 3(1), pages 139-140, May.
    3. Fung, Joseph K. W. & Cheng, Louis T. W. & Chan, Kam C., 2004. "The impact of the costs of subscription on measured IPO returns: the case of Asia," Journal of Corporate Finance, Elsevier, vol. 10(3), pages 459-465, June.
    4. Jay R. Ritter, 2003. "Differences between European and American IPO Markets," European Financial Management, European Financial Management Association, vol. 9(4), pages 421-434, December.
    5. Leung, Jeffery & Menyah, Kojo, 2006. "Issuer-oriented underpricing costs in initial public offers: Evidence from Hong Kong," Journal of Corporate Finance, Elsevier, vol. 12(5), pages 897-905, December.
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    1. Hahl, Teemu & Vähämaa, Sami & Äijö, Janne, 2014. "Value versus growth in IPOs: New evidence from Finland," Research in International Business and Finance, Elsevier, vol. 31(C), pages 17-31.
    2. Low, Soo-Wah & Yong, Othman, 2011. "Explaining over-subscription in fixed-price IPOs -- Evidence from the Malaysian stock market," Emerging Markets Review, Elsevier, vol. 12(3), pages 205-216, September.
    3. Vithessonthi, Chaiporn, 2014. "What explains the initial return of initial public offerings after the 1997 Asian financial crisis? Evidence from Thailand," Journal of Multinational Financial Management, Elsevier, vol. 27(C), pages 89-113.
    4. McGuinness, Paul B., 2016. "Voluntary profit forecast disclosures, IPO pricing revisions and after-market earnings drift," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 70-83.
    5. Goergen, Marc & Mazouz, Khelifa & Yin, Shuxing, 2010. "Price, volume and spread effects associated with the expiry of lock-in agreements: Evidence from the Hong Kong IPO market," Pacific-Basin Finance Journal, Elsevier, vol. 18(5), pages 442-459, November.

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