transcript
- Slide 1
- Slide 2
- Beatrice Presentation March 2, 2004 Robert M. Hull, a, b Robert
Kerchner, a Sungkyu Kwak, a Rosemary Walker a a School of Business,
Washburn University, 1700 SW College Avenue, Topeka, KS 66621 b
Corresponding author. Tel.: + 1-785 231 1010; fax: + 785 231 1063.
E mail address: rob.hull@washburn.edu (R. Hull) Earlier Version
Published in Proceedings of: American Financial Services, October
8, 2003 Final Version Published in: Investment Management and
Financial Innovation, 2005
- Slide 3
- We examine the markets response to IPOs surrounding the last
quarter of the year 2000. During this quarter, the financial press
began reporting insider accusations that investment bankers had
colluded with preferred clients to create profits in the IPO
aftermarket. We find that the underpricing associated with extreme
IPO aftermarket profits was sharply curtailed during this quarter.
Underpricing ceased altogether for the following quarter before
subsequently picking up. These findings become even more pronounced
after we compare IPO underpricing with that found for firms
undergoing seasoned offerings. We conclude that investment bankers,
for up to a six-month period, either ceased their alleged
aftermarket practices or drastically reduced their IPO profits to
pacify public sentiment. Abstract JEL classifications: D82; G14;
G32; G34 Key Words: Initial public offerings; Underpricing; IPO
Bubble; Underwriter compensation; Collusion; Seasoned
Offerings
- Slide 4
- Underpricing refers to selling shares below their fair value.
Underpricing for IPOs, as measured by first-day returns, is
cyclical reaching heights of 60% to 80% during the buoyant markets
of 1961, 1967-1968, 1980, and 1999-2000. In the United States,
first-day returns for IPOs averaged around 15% prior to 1999. The
unprecedented level of IPO underpricing for 1999-2000 is the most
widely recognized feature of what is now referred to as the IPO
bubble. This bubble can be likened to earlier bubbles such as the
17th century tulip craze in Holland. At the core of these bubbles
is a compulsive demand by zealous investors who often become
subject to price exploitation by opportunistic suppliers. The end
result for each bubble is absurdity. Can we imagine how it would
feel to save every penny of earnings for seven years to buy a tulip
bulb that later would sell for less than one days wage?
- Slide 5
- I P O I N F O Underpricing refers to selling shares below their
fair or true value. Underpricing can be defined as the true price
minus the offer price. Underpricing refers to selling shares below
their fair or true value. Underpricing can be defined as the true
price minus the offer price. For SEOs, underpricing is measured
ex-ante based on stock price data prior to the offering, e.g., the
closing market price the day before the offer date For SEOs,
underpricing is measured ex-ante based on stock price data prior to
the offering, e.g., the closing market price the day before the
offer date For IPOs, underpricing is measured ex-post based on the
closing market price at some designated time after the offering For
IPOs, underpricing is measured ex-post based on the closing market
price at some designated time after the offering Underpricing for
IPOs, as measured by first-day returns, averaged 15% prior to 1999.
Underpricing for IPOs, as measured by first-day returns, averaged
15% prior to 1999. Peaks for IPOs reach 60%-80% during 1961,
1967-1968, 1980, and 1999- 2000. Peaks for IPOs reach 60%-80%
during 1961, 1967-1968, 1980, and 1999- 2000. The IPO bubble, like
the 17th century tulip bubble or any bubble, has at the core a
compulsive demand by zealous investors who can become subject to
price manipulation by opportunistic suppliers. The IPO bubble, like
the 17th century tulip bubble or any bubble, has at the core a
compulsive demand by zealous investors who can become subject to
price manipulation by opportunistic suppliers.
- Slide 6
- Motivation for Research During the last quarter of the year
2000, the financial press reported allegations that investment
bankers operated kickback schemes with preferred IPO clients when
shares were bought and sold in the IPO aftermarket. Allegedly, both
the company (who raised less money) and individual investors (who
were not preferred clients and consequently paid too much in the
aftermarket) lost when exorbitant profits were made through the
manipulation of stock prices. According to a complaint filed
January 22, 2002 by the SEC, underwriters extracted from clients
(through excessive fees) a large portion of the underpricing
profits that those clients made in the IPO aftermarket.
- Slide 7
- Purpose We seek to empirically explore whether the allegations
of excessive IPO profits are rooted in factual underpricing numbers
during this period. We do this by analyzing IPOs surrounding the
last quarter of 2000 when the serious allegations began to surface.
If these allegations are true (or at least changed investment
bankers behavior to significantly lessen underpricing) then the
profits resulting from underpricing should begin subsiding during
the last quarter of the year 2000 when the allegations began
hitting the financial press.
- Slide 8
- Environmental Changes First, the internal environment within a
company changed in the late 1990s. Wilhelm and Ljungqvist (2003)
suggest that the extreme underpricing in the late 1990s can be
least partially accounted for by a variety of marked changes in
pre-IPO ownership structure and insider selling behavior over the
period. Second, the external environment affecting management
changed as investors clamored for more IPOs. This demand created a
situation where underwriters could more easily dictate the terms of
the IPO and collude with preferred customers to jointly capitalize
on the anticipated stock price run-up in the IPO aftermarket.
- Slide 9
- Economic Justification In a red-hot IPO market, it becomes more
imperative to gather truthful input from investors. Price support
can overcome the fact investment bankers in the countries like the
U.S. cannot price discriminate. Greater IPO underpricing leads to a
less favorable market reaction for subsequent offerings. U.S.
underwriters behave strategically in the allocation of IPOs
allocating favorable IPOs to customers who partake in unfavorable
IPOs.
- Slide 10
- Prior Research Underpricing for IPOs has been well documented
and is more extreme than that found for SEOs. There is overwhelming
international evidence of underpricing in IPOs. As measured by the
difference between the offer price and the first day of trading,
underpricing averages about 15% in industrialized countries and
about 60% in emerging markets. SEOs have not always focused on
underpricing. One exception is Hull and Kerchner (1996) who find
that underpricing is 2.97% of offer value (for example, for every
$100 of equity raised, the companies lose $2.97 due to
underpricing). However, when just small OTC firms (which are more
similar in size to IPO firms) are examined, they find that
underpricing is 4.26% of the value of the new offering. The
findings of Hull and Kerchner (2000) suggest underpricing should be
greater for small IPO companies.
- Slide 11
- Underpricing Measures Initial Public Offerings (IPOs) Initial
Public Offerings (IPOs) Ex-Ante Measure: Offer Price Minus Average
Price File Range Ex-Post Measure: Offer Price Minus Closing Price
One Week After the Offer Date Seasoned Public Offerings (SEOs)
Seasoned Public Offerings (SEOs) Ex-Ante Measure: Offer Price Minus
Closing Price the Day Before Offer Date Ex-Post Measure: Offer
Price Minus Closing Price One Week After the Offer Date Two
Underpricing Computations Two Underpricing Computations We will
compute both dollar underpricing and percentage underpricing
- Slide 12
- Testable Hypotheses We hypothesize that there should be a
drastic reduction in IPO underpricing during the last quarter of
2000. To determine the extent of the reduction, we shall compare
the last quarter of 2000 with the two previous quarters and the two
following quarters. To help accurately weigh any excessive profits,
we will contrast IPOs with SEOs. What happens in the SEO
aftermarket serves as a benchmark when conducting tests.
- Slide 13
- Table 1: Descriptive statistics for total period Key Variable
IPOs (n=246) SEOs (n=351) Offer Price $14.85 ($14.00) $35.73
($28.50) Ex-Ante Price $15.24 ($14.00) $37.13 ($29.56) Ex-Post
Price $20.55 ($15.63) $36.96 ($29.38) New Shares 16.52M (6.00M)
12.43M (4.50M) Offer Value $256M ($83M) $407M ($137M) Stock Value
$770M ($195M) $5264M ($1168M) $1058M ($241M) $8048M ($1591M) Firm
Value $1058M ($241M) $8048M ($1591M) Offer Value as a Offer Value
as a % of Firm Value 49.31% (32.92%) 9.09% (7.01%) % of Firm Value
49.31% (32.92%) 9.09% (7.01%)
- Slide 14
- Quarter Offering Type (n) Type (n) Offer Price Mean (Median)
Ex-Ante Price Mean (Median) Ex-Post Price Mean (Median) 4/1/00-
IPOs (n=85) 6/30/00 SEOs (n=70) $13.97 $13.00 $35.43 $30.50 $15.21
$15.00 $37.21 $32.04 $20.44 ($15.50) $36.35 ($32.72) 7/1/00 IPOs
(n=63) -9/30/00 SEOs (n=52) $16.38 $15.00 $44.06 $35.00 $15.13
$13.00 $45.30 $37.19 $27.15 ($21.25) $45.45 ($36.69) 10/1/00- IPOs
(n=52) 12/31/00 SEOs (n=72) $14.03 $13.25 $39.65 $30.41 $15.16
$14.00 $41.95 $32.57 $15.82 ($14.60) $41.39 ($33.34) 1/1/01- IPOs
(n=20) 3/31/01 SEOs (n=68) $11.40 $11.50 $33.97 $26.09 $13.56
$13.50 $34.90 $26.88 $12.29 ($11.90) $34.97 ($28.01) 4/1/01- IPOs
(n=26) 6/30/01 SEOs (n=89) $18.32 $15.50 $29.28 $23.68 $17.09
$15.00 $30.09 $23.81 $20.69 ($17.56) $30.41 ($24.60) Table 2:
Descriptive Statistics for Quarters
- Slide 15
- Table 3: Underpricing results for total period Key Variable
IPOs (n=246) SEOs (n=351). mean (median) mean (median). Ex-Ante
Underpricing $28.3 ($0.0) $13.4 ( $3.5) (Offer Price Ex-Ante
Price)(New Shares). Ex-Ante Underpr. %age 1.2 % (0.0 % ) 3.5 % (
3.0 % ) (Offer Price Adjusted Ex-Ante Price)(Adjusted Ex-Ante
Price). Adj. Ex-Post Underpr. $40.1 ( $13.5) $11.1 ( $3.4) (Offer
Price Adjusted Ex-Post Price)(New Shares). Adj. Ex-Post Und. %age
34.8 % ( 13.0 % ) 4.9 % ( 3.1 % ) (Offer Price Adjusted Ex-Post
Price)(Offer Price). Adj. Ex-Post Underpr. * $11.8 ( $4.0) $2.4 (
$0.2) (Ex-Ante Price * Adjusted Ex-Post Price)(New Shares). Adj.
Ex-Post Und. %age * 42.5 % ( 4.5 % ) 1.2 % ( 0.3 % ) (Ex-Ante Price
* Adjusted Ex-Post Price)(Offer Price).
- Slide 16
- Quarter Offering Type (n) Type (n) Ex-Ante Underpricing
AdjustedEx-PostUnderpricing Adjusted Ex-Post Underpricing if Offer
Price Set at Ex-Ante Price 4/1/00- IPOs (n=85) 6/30/00 SEOs (n=70)
-$7.3M; -$4.0M -$13.9M; -$5.1M -$46.6M; -$13.6M -$4.0M; -$1.2M
-$39.9M; -$2.0M +$15.5M; -$0.0M 7/1/00 IPOs (n=63) -9/30/00 SEOs
(n=52) +$11.7M; +$7.8M -$5.9M; -$2.1M -$73.0M; -$33.2M -$13.6M;
-$1.8M -$82.7M; -$46.3M -$10.6M; +$1.6M 10/1/00- IPOs (n=52)
12/31/00 SEOs (n=72) -$39.2M; -$6.9M -$31.7M; -$5.0M -$10.1M;
-$7.2M -$13.4M; -$5.4M +$29.6M; -$0.0M +$18.1M; -$3.1M 1/1/01- IPOs
(n=20) 3/31/01 SEOs (n=68) -$337M; -$8.8M -$7.4M; -$3.6M +$4.4M;
-$3.3M -$13.5M; -$6.2M +$338M; +$7.3M +$0.0M; +$2.0M 4/1/01- IPOs
(n=26) 6/30/01 SEOs (n=89) +$65.8M; +$7.4M -$7.3M; -$2.6M -$33.2M;
-$13.0M -$11.5M; -$2.5M -$91.1M; -$21.1M -$5.0M; -$0.6M Table 4:
Underpricing by quarters: dollar change results
- Slide 17
- Quarter Offering Type (n) Type (n)Ex-AnteUnderpricingPercentage
Adjusted Ex-Post UnderpricingPercentage Adjusted Ex-Post
Underpricing if Offer Price Set at Ex-Ante Price 4/1/00- IPOs
(n=85) 6/30/00 SEOs (n=70) -7.42%; -7.69% -5.13%; -4.80% -37.65%;
-12.87% -3.23%; -1.72% -37.37%; +1.50% +2.13%; +1.15% 7/1/00 IPOs
(n=63) -9/30/00 SEOs (n=52) +11.10%; +8.33% -2.72%; -2.76% -64.26%:
-32.39% -4.16%; -1.54% -96.87%; -51.02% -1.38%: +2.39% 10/1/00-
IPOs (n=52) 12/31/00 SEOs (n=72) -5.97%; -7.69% -3.39%; -3.27%
-14.95%; -6.86% -6.37%; -4.24% -9.51%; +1.60% -2.90%; -1.19%
1/1/01- IPOs (n=20) 3/31/01 SEOs (n=68) -11.52%; -10.42% -3.41%;
-2.50% -3.41%; -2.50% -8.13%; -4.65% -6.14%; -5.26% +1.97%; +4.47%
-2.49%; -1.53% 4/1/01- IPOs (n=26) 6/30/01 SEOs (n=89) +6.57%;
+4.37% -3.00%; -2.79% -14.52%; -8.38% -4.39%; -3.22% -23.23%;
-9.75% -1.23%; -0.29% Table 5: Underpricing by quarters: percentage
change results
- Slide 18
- Exhibit 2. Mean Difference Results for Adjusted Ex-Post
Underpricing Q1Q2Q3Q4Q5 Total Period IPO Mean $46.62M (n = 85)
$73.14M (n = 63) $10.10M (n = 52) +$4.36M (n = 20) $33.16M (n = 26)
$40.12M (n = 246) SEO Mean $3.95M (n = 70) $13.56M (n = 52) $13.36M
(n = 72) $13.53M (n = 68) $11.58M (n = 89) $11.10M (n = 351)
MeanDifference $42.67M $59.58M +3.26M+17.89M $21.58M $29.02M t
statistic 2.33 2.70 +0.25+0.35 2.10 3.25
SignificantLevel0.0210.0080.8040.7290.0430.001
- Slide 19
- Exhibit 3. Mean Difference Results for Adjusted Ex-Post
Underpricing Percentage Q1Q2Q3Q4Q5 Total Period IPO Mean 37.65% (n
= 85) 64.26% (n = 63) 14.95% (n = 52) 8.13% (n = 20) 14.52% (n =
26) 34.82% (n = 246) SEO Mean 3.23% (n = 70) 4.16% (n = 52) 6.37%
(n = 72) 6.14% (n = 68) 4.39% (n = 89) 4.87% (n = 351)
MeanDifference 34.42% 60.10% 8.58% 1.99% 10.13% 29.95% t statistic
4.49 5.05 2.05 0.51 2.03 6.95 SignificantLevel