Quarterly Publication of Multinational Finance Society • ISSN 1096-1879

Volume 4 Numbers 1&2 March/June 2000

Special Issue on Initial Public Offerings
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 1-4)

George J. Papaioannou
Hofstra University, U.S.A.
Nickolaos G. Travlos,
Athens Laboratory of Business Administration (ALBA), Greece,
and Cardiff Business School, U.K.

Introduction Letter

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The Relationship Between Overallotment Options, Underwriting Fees and Price Stabilization For Canadian IPOs
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 5-34)

Richard Chung
Concordia University, Canada
Lawrence Kryzanowski
Concordia University, Canada
Ian Rakita
Concordia University, Canada

The overallotment option (OAO) gives underwriters the right to acquire additional shares from the issuing firm at the offer price (less underwriting fees) in order to meet any excess demand for an issue. Thus, underwriters can use overallotment options to stabilize market prices post-issue by increasing the supply of shares for oversold issues. Unlike IPOs in the U.S., the Canadian evidence finds that OAOs are included less frequently, that underwriting fees are positively associated with OAO inclusion, and that the OAO appears to play a minor role in market price stabilization, which is itself less detectable and appears to be limited to the very early stages of secondary market trading. These results suggest that the role of the OAO differs markedly for IPOs in Canadian versus U.S. markets (JEL G10, G15).

Keywords: initial public offerings, overallotment options, price stabilization, underwriting fees.

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Hot and Cold IPO Markets: Identification Using a Regime Switching Model
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 35-68)

Tim Brailsford
Australian National University, Australia
Richard Heaney
Australian National University, Australia
John Powell
University of Otago, New Zealand
Jing Shi
Australian National University, Australia

The market for unseasoned equity has the unusual and distinguishing feature of periods of concentrated activity in terms of both volume and underpricing. This paper formally documents the existence of such periods using a regime-switching model that dates transitions between hot and cold states. A number of hot periods are identified over a 20-year period using a variety of IPO activity measures that capture different aspects of new issue volume, proceeds and underpricing. The study further documents a leading relationship between underpricing and IPO volume of up to six months. This relationship supports the contention that the decision to issue is a function of current underpricing. Various reasons are hypothesised for this result and the paper finds supportive evidence through a VAR analysis that reveals the influence of stock market and business conditions. The results have implications for the information contained in current market conditions and the role of issuers, underwriters and investors (JEL G12, G14, G32).

Keywords: hot issues, IPOs, regime-switching, stock market, unseasoned issues.

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Privatization versus Private Sector Initial Public Offerings in Poland
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 69-99)

Wolfgang Aussenegg
Vienna University of Technology, Austria

This article compares the characteristics and the price behavior of case-by-case privatization initial public offerings and private sector initial public offerings in Poland over the first nine years after the reopening of the Warsaw Stock Exchange in April 1991. There is evidence that the Polish government is market-oriented, trying to build up reputation for its privatization policy over time by underpricing, selling a high fraction at the initial offer and underpricing more when selling to domestic retail investors. In the long run privatization initial public offerings experience neither an under- nor an overperformance. A lower political influence has no effect on the long-run performance of privatized companies (JEL G12, G18, G38).

Keywords: initial public offerings, long-run performance, privatization, underpricing.

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The Predictability of Management Forecast Error: A Study of Australian IPO Disclosures
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 101-132)

Neil Hartnett
The University of Newcastle, Australia
Jennifer Römcke
The University of Newcastle, Australia

Contemporaneous evidence of corporate revenue and profit forecasting error is provided in a different institutional context, Australian sharemarket initial public offerings. This article extends the literature on company forecast risk by incorporating new proxies for forecasting error (float motive, subscription price premium, range of activities and internationalisation) and by refining others. The study investigates the association between earnings forecast risk and conventional ex-ante uncertainty proxies used to explain IPO underpricing. Ex-ante and ex-post explanatory variables are distinguished and a forecast error prediction model is tested. The results show revenue forecast errors were smaller and less sensitive than those for profit. Strong associations are reported between forecast error and float motive, audit quality and unanticipated industry activity. The link between earnings forecast error and proxies for initial public offering underpricing is observed. Predictability was poor regarding individual company forecast error, but improved for portfolio average forecasting error (JEL D80, G14, M41, N27).

Keywords: error, forecast, IPO, prediction, profit, underpricing.

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An Analysis of Factors Affecting Investor Demand for Initial Public Offerings in Singapore
(Multinational Finance Journal, 2000, vol. 4, no. 1&2, pp. 133-153)

Li Li Eng
The National University of Singapore, Singapore
Hwee Shan Aw
The National University of Singapore, Singapore

This article investigates the impact of fundamentals of initial public offering (IPO) firms on two categories of investors, large and small investors. In the decision to purchase IPOs, the demand by large investors is positively associated with earnings yield, firm size and underpricing, and negatively associated with book-to-market ratio. Large investor demand is higher for issues denominated in the local currency (Singapore dollars) than issues denominated in foreign currencies. In contrast, the demand by small investors is negatively associated with earnings yield, firm size and underpricing. Small investor demand is also lower for issues denominated in Singapore dollars than issues denominated in foreign currencies (JEL G14, G32, M41).

Keywords: initial public offerings, fundamentals, small investors, large investors.

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