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Investigating the partial adjustment effect of Brazilian IPOs

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  • Minardi, Andrea Maria Accioly Fonseca
  • Moita, Rodrigo Menon
  • Castanho, Rafael Plantier

Abstract

Global literature reports positive initial return in IPOs, or “money left on the table” by the issuing companies. One possible cause is that when the underwriter perceives high demand, she adjusts upward the offer price, but not the full fair price. This partial adjustment creates positive first day return, which is used to compensate informed investors for revealing truthful information during the book building process. We investigate Brazilian IPOs issued between 2004 and 2012 and find evidence similar to the findings in the US. The launching price is lower than the first day closing price, and underwriter increases the number of shares in the aftermarket with the overallotment option. The new shares issued in the aftermarket reduce the “money left on the table” and at the same time compensates informed investors. Surprisingly the underpricing is less than half of the one reported in the US.

Suggested Citation

  • Minardi, Andrea Maria Accioly Fonseca & Moita, Rodrigo Menon & Castanho, Rafael Plantier, 2015. "Investigating the partial adjustment effect of Brazilian IPOs," Journal of Business Research, Elsevier, vol. 68(2), pages 189-198.
    • Handle: RePEc:eee:jbrese:v:68:y:2015:i:2:p:189-198
    DOI: 10.1016/j.jbusres.2014.09.027
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    References listed on IDEAS

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    1. Marcato, Gianluca & Milcheva, Stanimira & Zheng, Chen, 2018. "Market integration, country institutions and IPO underpricing," Journal of Corporate Finance, Elsevier, vol. 53(C), pages 87-105.
    2. Lin, Winston T. & Chen, Yueh H. & Hung, TingShu, 2019. "A partial adjustment valuation approach with stochastic and dynamic speeds of partial adjustment to measuring and evaluating the business value of information technology," European Journal of Operational Research, Elsevier, vol. 272(2), pages 766-779.

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