Market Discount on New Issues of Equity: The Influence of Firm Size, Method of Issue and Market Volatility

Abstract

The object of this study was the investigation of the nature of market discount arising on a cross-section of newly quoted equities in the London new issue market. Such a discount or premium of market over issue price indicates a discrepancy between the equity valuation established for the firm with its advisors on the one hand and, on the other, that subsequently revealed by the Stock Market in its early dealings in the share. It may be considered to arise as a result of error or uncertainty in the pricing process or of certain systematic elements which lead to the fucing of the issue price at a level which will provide, in effect, a discount for applicants at that price. The purpose of our analysis was to examine the extent to which this phenomenon is influenced by systematic factors, in particular, the size of firm or issue. A large part of our research necessarily reexamined previous work by other researchers, most notably, Merrett, Howe and Newbould (l), on the efficiency of the London new issue market in establishing values for new equity issues by previously unquoted firms. In this respect our work has had to test for the continued influence of those systematic characteristics of the issuing process or the firms themselves that were a feature of previous work. One aspect which is particularly important is, of course, the significance of alternative methods of issue, which Merrett, Howe and Newbould found to be strongly related to the level of discount.

The Underpricing of Initial Public Offerings in the Philippines from 1987 to 1997

“…It has also been shown that IPO underpricing and volume tends to be cyclical [Ibbotson and Jaffe (1975); Ibbotson, Sindelar, and Ritter (1994)]. For non-U.S. markets, this finding has been confirmed by Davis and Yeomans (1976) in the UK, McGuinness (1992) in Hong Kong, and Rydqvist (1993) in Sweden. The number of IPOs and average initial returns provide some collaboration of the presence of a "hot issues" market in the Philippines.…”

Are government-linked IPOs underpriced? A three country privatization effort comparison

“…The corresponding number reported in Malaysia was 104%; in Singapore it was 36.5%; in UK from it was 9.1%; and in the United States (US) it was 18.9%. The test periods varied in these countries: in UK, the test period was over the period over 1965-1976in Malaysia, 1975in Malaysia, -1984andin Singapore, 1973-1989. The number of firms covered in the samples was larger in the US studies where one study by Ibboston, Sindelar, and Ritter (1988) included 8,668 firms over .…”

“…Reilly and Hatfield's (1969) report of underpricing of initial public offers (IPOs) in United States has been followed by reports of underpricing in several developed, as well as developing share markets. For example, Davis and Yeomans (1976) reported IPO underpricing Int Entrep Manag J ( …”

Pricing IPOs: An Approach for Spanish Firms

“…There is overwhelming evidence that underpricing is higher in buoyant stock markets: among others, Davis and Yeomans (1976) for the UK, Reilly (1977) in the US, McGuinness (1992) in Hong Kong and Rydqvist (1993) in Sweden all show that initial returns tend to be higher following periods of high returns on the market index. In Germany, IPOs are more heavily underpriced not only when the market is performing well, but also in macroeconomic upswings and when already-listed firms issue historically large amounts of seasoned equity (Ljungqvist, 1995).…”