IDEAS home Printed from https://ideas.repec.org/a/spr/eurase/v10y2020i2d10.1007_s40822-018-0124-2.html
   My bibliography  Save this article

Initial public offering price support, valuation, and returns

Author

Listed:
  • Lokman Tutuncu

    (Bulent Ecevit University)

Abstract

This study examines the relationship between price support, valuation and returns in a unique sample of 114 firms going public at Borsa Istanbul. I utilize disclosed information in pre-issue prospectuses and valuation reports as well as post-issue material event files to document that: initial public offerings implementing price support have lower initial and short-term returns, and larger optimistic valuation bias relative to offerings without price support. Tests show that underwriters’ valuation bias increases the probability of implementing price support, and one standard deviation increase in price support is associated with a 19.4% decline in short-term returns, after controlling for the selection bias associated with simultaneously deciding the offer price and price support.

Suggested Citation

  • Lokman Tutuncu, 2020. "Initial public offering price support, valuation, and returns," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(2), pages 267-282, June.
    • Handle: RePEc:spr:eurase:v:10:y:2020:i:2:d:10.1007_s40822-018-0124-2
    DOI: 10.1007/s40822-018-0124-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40822-018-0124-2
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s40822-018-0124-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Benveniste, Lawrence M. & Busaba, Walid Y. & Wilhelm Jr., William J., 1996. "Price stabilization as a bonding mechanism in new equity issues," Journal of Financial Economics, Elsevier, vol. 42(2), pages 223-255, October.
    2. Allen, Franklin & Faulhaber, Gerald R., 1989. "Signalling by underpricing in the IPO market," Journal of Financial Economics, Elsevier, vol. 23(2), pages 303-323, August.
    3. Sturla Lyngnes Fjesme, 2019. "When do investment banks use IPO price support?," European Financial Management, European Financial Management Association, vol. 25(3), pages 437-461, June.
    4. Alford, Aw, 1992. "The Effect Of The Set Of Comparable Firms On The Accuracy Of The Price Earnings Valuation Method," Journal of Accounting Research, Wiley Blackwell, vol. 30(1), pages 94-108.
    5. Stefano Paleari & Andrea Signori & Silvio Vismara, 2014. "How Do Underwriters Select Peers When Valuing IPOs?," Financial Management, Financial Management Association International, vol. 43(4), pages 731-755, December.
    6. Benveniste, Lawrence M. & Spindt, Paul A., 1989. "How investment bankers determine the offer price and allocation of new issues," Journal of Financial Economics, Elsevier, vol. 24(2), pages 343-361.
    7. Katharina Lewellen, 2006. "Risk, Reputation, and IPO Price Support," Journal of Finance, American Finance Association, vol. 61(2), pages 613-653, April.
    8. Chowdhry, Bhagwan & Nanda, Vikram, 1996. "Stabilization, Syndication, and Pricing of IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(1), pages 25-42, March.
    9. Katrina Ellis & Roni Michaely & Maureen O'Hara, 2000. "When the Underwriter Is the Market Maker: An Examination of Trading in the IPO Aftermarket," Journal of Finance, American Finance Association, vol. 55(3), pages 1039-1074, June.
    10. Fjesme, Sturla Lyngnes, 2016. "Initial Public Offering Allocations, Price Support, and Secondary Investors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(5), pages 1663-1688, October.
    11. Chen, Zhaohui & Wilhelm Jr., William J., 2008. "A theory of the transition to secondary market trading of IPOs," Journal of Financial Economics, Elsevier, vol. 90(3), pages 219-236, December.
    12. Hao, Qing, 2007. "Laddering in initial public offerings," Journal of Financial Economics, Elsevier, vol. 85(1), pages 102-122, July.
    13. Roosenboom, Peter, 2012. "Valuing and pricing IPOs," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1653-1664.
    14. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    15. Matteo Bonaventura & Giancarlo Giudici, 2017. "IPO valuation and profitability expectations: evidence from the Italian exchange," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 7(2), pages 247-266, August.
    16. Hanley, Kathleen Weiss & Kumar, A. Arun & Seguin, Paul J., 1993. "Price stabilization in the market for new issues," Journal of Financial Economics, Elsevier, vol. 34(2), pages 177-197, October.
    17. Francis, J & Olsson, P & Oswald, DR, 2000. "Comparing the accuracy and explainability of dividend, free cash flow, and abnormal earnings equity value estimates," Journal of Accounting Research, Wiley Blackwell, vol. 38(1), pages 45-70.
    18. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March.
    19. Reena Aggarwal, 2000. "Stabilization Activities by Underwriters after Initial Public Offerings," Journal of Finance, American Finance Association, vol. 55(3), pages 1075-1103, June.
    20. William J. Wilhelm, 1999. "SECONDARY MARKET STABILIZATION OF IPOs," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(1), pages 78-85, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bradley, Daniel J. & Gonas, John S. & Highfield, Michael J. & Roskelley, Kenneth D., 2009. "An examination of IPO secondary market returns," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 316-330, June.
    2. Lokman Tutuncu, 2020. "Lock-up provisions and valuation of Turkish IPOs," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 10(4), pages 587-608, December.
    3. Jones, Steven L. & Yeoman, John C., 2014. "Initial uncertainty and the risk of setting a fixed-offer price: Implications for the pricing of bookbuilt and best-efforts IPOs," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 194-215.
    4. Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, August.
    5. Chong, Beng Soon & Liu, Zhenbin, 2020. "Issuer IPO underpricing and Directed Share Program (DSP)," Journal of Empirical Finance, Elsevier, vol. 56(C), pages 105-125.
    6. Khelifa Mazouz & Sam Agyei-Ampomah & Brahim Saadouni & Shuxing Yin, 2013. "Stabilization and the aftermarket prices of initial public offerings," Review of Quantitative Finance and Accounting, Springer, vol. 41(3), pages 417-439, October.
    7. Jiao, Yawen & Kutsuna, Kenji & Smith, Richard, 2017. "Why do IPO issuers grant overallotment options to underwriters?," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 34-47.
    8. Su Han Chan & Ko Wang & Jing Yang, 2009. "IPO Pricing Strategies with Deadweight and Search Costs," Journal of Real Estate Research, American Real Estate Society, vol. 31(4), pages 481-542.
    9. Evgeny Lyandres & Fangjian Fu & Erica X. N. Li, 2018. "Do Underwriters Compete in IPO Pricing?," Management Science, INFORMS, vol. 64(2), pages 925-954, February.
    10. Kenji Kutsuna & Janet Kiholm Smith & Richard L. Smith, 2009. "Public Information, IPO Price Formation, and Long‐Run Returns: Japanese Evidence," Journal of Finance, American Finance Association, vol. 64(1), pages 505-546, February.
    11. Li, Mingsheng & Eisenstadt, Robert C., 2005. "Price support and spreads in the IPO aftermarket: An empirical microstructure study," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(4-5), pages 748-766, September.
    12. Charlie Charoenwong & David K. Ding & Tiong Yang Thong, 2016. "Decimalization, IPO aftermath, and liquidity," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1303-1344, November.
    13. Katharina, Lewellen, 2004. "Risk, Reputation, and the Price Support of IPOs," Working papers 4453-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    14. Tim Jenkinson & Howard Jones, 2007. "The Economics of IPO Stabilisation, Syndicates and Naked Shorts," European Financial Management, European Financial Management Association, vol. 13(4), pages 616-642, September.
    15. Chen, Zhaohui & Wilhelm Jr., William J., 2008. "A theory of the transition to secondary market trading of IPOs," Journal of Financial Economics, Elsevier, vol. 90(3), pages 219-236, December.
    16. Josef Schuster, 2003. "The Cross-Section of European IPO Returns," FMG Discussion Papers dp460, Financial Markets Group.
    17. Fouad Jamaani & Manal Alidarous, 2019. "Review of Theoretical Explanations of IPO Underpricing," Journal of Accounting, Business and Finance Research, Scientific Publishing Institute, vol. 6(1), pages 1-18.
    18. Schuster, Josef Anton, 2003. "The cross-section of European IPO returns," LSE Research Online Documents on Economics 24859, London School of Economics and Political Science, LSE Library.
    19. Alexander Ljungqvist & Vikram Nanda & Rajdeep Singh, 2006. "Hot Markets, Investor Sentiment, and IPO Pricing," The Journal of Business, University of Chicago Press, vol. 79(4), pages 1667-1702, July.
    20. Bajo, Emanuele & Barbi, Massimiliano & Petrella, Giovanni, 2017. "Do firms get what they pay for? A second thought on over-allotment option in IPOs," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 219-232.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:eurase:v:10:y:2020:i:2:d:10.1007_s40822-018-0124-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.