Are IPOs Really Underpriced?

Purnanandam, Amiyatosh; Swaminathan, Bhaskaran

doi:10.1093/rfs/hhg055

Cited by 476 publications

(436 citation statements)

References 46 publications

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“…If acquisition currency motives are important in IPOs, we expect underpricing to be positively related to stock financed acquisitions since IPO underpricing is positively correlated with overvaluation of the stock, as shown by Purnanandam and Swaminathan (2004). …”

Section: Variables Related To Acquisition Currencymentioning

confidence: 99%

“…Hence, if the acquisition currency motive is important, we expect to see a higher amount of stock financed acquisitions for IPO firms with overvalued stock. We use IPO underpricing as a measure of overvaluation around the IPO as suggested by Purnanandam and Swaminathan (2004) who show that the most overvalued IPO firms have the greatest IPO underpricing.…”

Section: Motivations For Ipos and Empirical Designmentioning

confidence: 99%

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Going public to acquire? The acquisition motive in IPOs

Çelikyurt

Sevilir

Shivdasani

2010

Journal of Financial Economics

222

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Newly public firms make acquisitions at a torrid pace. Their large acquisition appetite reflects the concentration of IPOs in M&A intensive industries, but acquisitions by IPO firms also outpace those by mature firms in the same industry. IPO firms' acquisition activity is fueled by the initial capital infusion at the IPO and through the creation of an acquisition currency that is used to raise capital for both cash and stock financed acquisitions along with debt issuance subsequent to the IPO. IPO firms play a bigger role in the M&A process by participating as acquirers than they do as takeover targets and acquisitions are at least as important as R&D and CAPEX for their growth. The pattern of acquisition activity following an IPO is important in explaining the evolution of ownership structure of newly public firms. JEL Codes: G32, G34Address Correspondence to Anil Shivdasani * We thank Uli Hege, Chris James, Michelle Lowry, Henri Servaes, and participants at the 2008 AFA meetings, the RICAFE Conference, the ESSEC Private Equity Conference, the 2007 Jackson Hole Finance Conference, and at University of North Carolina for helpful comments. 2 IntroductionWhy do firms choose to go public? An IPO is one of the most consequential events in the life of a company, but our understanding of this decision remains incomplete. Existing theories offer several insights for why firms decide to go public. In theory, an IPO creates liquidity for the firm's shares, provides an infusion of capital to fund growth, allows insiders to cash out, provides cheaper and ongoing access to capital, facilitates the sale of the company, gives founders the ability to diversify their risk, allows venture capitalists and other early stage investors to exit their investment, and increases the transparency of the firm by subjecting it to capital market discipline. Weisbach (2008) show that financing of capital expenditures and the desire to benefit from potential overvaluation are motives for seasoned equity offerings (SEOs) and IPOs.We study a relatively unexplored motive for IPOs -the desire to make acquisitions. We conduct a number of tests to provide some insight on the determinants of post-IPO M&A activity. Our first observation is that the M&A activity of IPO firms is strongly linked to the amount of M&A activity within their industry. In other words, IPOs tend to occur in industries with high M&Aactivity. Yet, industry clustering of IPOs and M&A does not fully explain the acquisition appetite of IPO firms -by most benchmarks, IPO firms are more prolific acquirers than the mature public firms within their industry.We consider three potential avenues by which an IPO can facilitate future M&A activity and explore whether these explain the acquisition volumes by IPO firms. An IPO can allow companies to pursue M&A by providing an infusion of cash, by opening the possibility of paying for an acquisition with overvalued stock, and by resolving the uncertainty about the pre-IPO valuation of the firm and the 1 In other work, Brown, Dittmar...

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Section: Variables Related To Acquisition Currencymentioning

confidence: 99%

Section: Motivations For Ipos and Empirical Designmentioning

confidence: 99%

Going public to acquire? The acquisition motive in IPOs

Çelikyurt

Sevilir

Shivdasani

2010

Journal of Financial Economics

222

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“…Following the work of Purnanandam and Swaminathan (2003) we use measures of profitability to assess the potential viability of the firm issuing IPO. We propose that highly profitable firms will be priced at a higher level and that market participants will be willing to pay a higher price for the IPO.…”

Section: H1mentioning

confidence: 99%

Investor Sentiment, Profitability and Offer Price Band: Evidence from the Indian IPO Market

Krishnamurti

Pensiero²

2014

GEFJ

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“…Purnanandam and Swaminathan (2004) have shown that newly issued stocks are overpriced significantly when they are compared with their industry peers. These stocks may be able to provide investors the positive initial return but they will lead to the long run poor performance.…”

Section: Previous Studies About New Issuesmentioning

confidence: 99%

The Performance of Newly Issued Stocks in Thailand

Aumeboonsuke¹,

Tangjitprom²

2011

IJEF

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This paper aims to examine the relative long-run performance of the newly issued stocks in the Stock Exchange of Thailand (SET). The sample of 325 newly issued stocks in Stock Exchange of Thailand during the year 1990 -2006 is filtered to 314 stocks by excluding the issues during the mid-1997 to 1998 Asian Financial Crisis period. 3-year and 5-year holding period returns of IPO portfolio are compared with those of the matching firms. In addition to the event study, the time series cross-sectional regressions are employed to investigate the long-run overpriced of newly issued stocks when controlling for size and Book-to-Market Value ratio. The overall results show that, relative to that of the size-matched portfolio, the long-run performance of portfolio consist of was underperformed by approximately 15% and 29% for the three-year holding period portfolio and five-year holding period portfolio, respectively.

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Are IPOs Really Underpriced?

Cited by 476 publications

References 46 publications

Going public to acquire? The acquisition motive in IPOs

Going public to acquire? The acquisition motive in IPOs

Investor Sentiment, Profitability and Offer Price Band: Evidence from the Indian IPO Market

The Performance of Newly Issued Stocks in Thailand

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