Simultaneous effects of clustering and endogeneity on the underpricing difference of IPO firms: A global evidence

Jamaani, Fouad; Ahmed, Abdullahi D.

doi:10.1016/j.ribaf.2020.101250

Cited by 22 publications

(35 citation statements)

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“…First, we account for the effect of clustering in error terms within countries. Jamaani and Ahmed (2020) find that not accounting empirically for the impact of clustering in error terms within countries can result in overstating t -statistic values. Therefore, we employ cluster-robust standard errors estimation within countries following Jamaani and Ahmed (2020).…”

Section: Robustness Testsmentioning

confidence: 85%

“…Jamaani and Ahmed (2020) find that not accounting empirically for the impact of clustering in error terms within countries can result in overstating t -statistic values. Therefore, we employ cluster-robust standard errors estimation within countries following Jamaani and Ahmed (2020). The ten models in Table 5 report consistent results that fully support the reported outcomes in Table 4 even after controlling for 61 country clusters.…”

Section: Robustness Testsmentioning

confidence: 85%

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The single and joint effects of financial intervention policies introduced by governments and power distance culture on returns of equity markets during the COVID-19

Jamaani

2021

CCSM

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PurposeThis paper uniquely aims to triangulate the effects of the COVID-19 pandemic, government financial intervention (GFI) policies and power distance (PD) culture on returns of equity indices during the COVID-19 epidemic in the world's equity markets.Design/methodology/approachThe research employs panel data regression analysis using 1,937 observations from 19 developed and 42 developing countries. The data employed contain daily registered COVID-19 cases, global equity market index prices, financial intervention policies introduced by governments and Hofstede's cultural dimension measure of PD.FindingsThe authors find that investors certainly react negatively to the number of confirmed COVID-19 cases reported, that GFI policies indeed reinforce investors' expectations of policymakers' dedication to stabilize the economy during the COVID-19 pandemic and that equity investors in high PD cultures overreact to GFI news, resulting in more positive stock returns. The authors discover a difference between developed and developing countries in terms of the effect of GFI policies and PD on equity returns.Research limitations/implicationsResults suggest that investors react negatively to the daily registered COVID-19 cases. The authors find that financial intervention policies introduced by governments reinforce investors' outlooks of policymakers' commitment to stabilize local stock markets during the coronavirus pandemic. The results confirm that equity market investors in PD cultures overreact to financial intervention news, thus resulting in more positive stock returns.Practical implicationsThe paper provides three original contributions. First, it helps us to understand the single effect of the COVID-19 and financial intervention policies introduced by governments on returns of the global equity market. Second, it examines the possibility of a two-way joint effect between the COVID-19 and financial intervention policies introduced by governments and the COVID-19 and differences in countries characterized by a PD culture concerning stock market returns. Third, it investigates the possibility of a three-way interaction effect between the COVID-19 contagion, financial intervention policies introduced by governments and culture on returns of equity markets.Originality/valueThe authors' findings are valuable to researchers, investors and policymakers. Culture and finance scholars can now observe the role of Brown et al.'s (1988) uncertain-information hypothesis with reference to the effect of the COVID-19 and financial interventions policies introduced by governments on returns of equity markets. This is because the authors' findings underline that since investors' uncertainty declines with daily registered numbers of COVID-19 cases, the introduction of GFI policies function as a neutralizing device to re-establish investors' expectations to equilibrium. Consequently, stock market returns follow a random walk that is free from the negative effect of the COVID-19. The authors' work is likely to advise equity investors and portfolio managers about the extent to which major exogenous economic events such the outbreak of global diseases, financial interventions policies introduced by governments and differences in countries' PD culture can individually and jointly influence the return of the world's equity markets. Investors and portfolio managers can employ the authors' results as a guideline to adjust their investment strategy based on their investment decision strategy during global pandemics. Policymakers aiming to introduce financial intervention policies to stabilize their stock market returns during global pandemics can benefit from our results. They can observe the full effect of such policies during the current COVID-19, and subsequently be better prepared to choose the most effective form of financial intervention policies when the next pandemic strikes, hopefully never.

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Section: Robustness Testsmentioning

confidence: 85%

Section: Robustness Testsmentioning

confidence: 85%

The single and joint effects of financial intervention policies introduced by governments and power distance culture on returns of equity markets during the COVID-19

Jamaani

2021

CCSM

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“…The finance literature documents pervasive clustering phenomena. Similarly, IPO literature also documents IPO clustering around certain variables, such as year, industry, country and price terms (Onali et al , 2017; Jamaani and Ahmed, 2020). Estimations that do not consider the clustering effect may lead to biased standard errors, leading to incorrect conclusions (Petersen, 2009; Cameron and Miller, 2015; Jamaani and Ahmed, 2020).…”

Section: Empirical Findingsmentioning

confidence: 99%

Shariah vs non-shariah IPO underpricing: evidence from Indonesia Stock Exchange

Hanafi

2022

JIABR

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Purpose This study aims to investigate the effect of shariah status on initial public offering (IPO) underpricing, long-term performance and relationship between short-term and long-term IPO performance, and attempt to gain an insight into the nature of shariah IPO underpricing: a signal or an overreaction. Design/methodology/approach This study uses IPOs during 1990–2018 from Indonesia. This study uses clustered regressions to address clustering phenomenon in IPO. To investigate long-term performance, this study uses cumulative returns, cumulative abnormal returns and Fama–French three factor regressions. This study also runs cross-sectional regressions on the relationship between short and long-term performances. Findings This study finds that shariah status reduces lowers non-trading returns (return from offer to open prices), suggesting that shariah status may reduce information asymmetry and compensation. This study finds that both shariah and non-shariah IPOs underperform the benchmarks, with shariah IPOs underperform more. Further analysis shows a negative relationship between initial return and long-term performance for both shariah and non-shariah IPOs, whereas the negative relationship is stronger for shariah IPOs. The results indicate that shariah compliance help reduce information asymmetry; however, shariah compliance does not necessarily signal quality. Instead, shariah compliance seems to induce investor sentiment, resulting in underperformance and reversal patterns in the long run. Research limitations/implications The results have various implications. Issuers may use shariah screening to lower underpricing. Investors may manage their investment horizons to mitigate IPO underperformance. Future research is needed to understand the nature of short and long-term performance of shariah IPO across countries. The use of ex-ante shariah definition becomes our limitation. This study also does not use buy and hold return to investigate long-term performance. Practical implications The results have various implications. Issuers may use shariah screening to lower underpricing. The results show that sharia certification may play an important role in the IPO process. However, sharia status induces individual investors, leading to more overreaction in the long term. Thus, companies need to balance between sharia certification and overreaction in the long term. Investors may manage their investment horizons to mitigate IPO underperformance. Originality/value This paper extends studies on the effect of shariah status on IPO performance using Indonesia data. Using non-trading returns, this study provides sharper analysis on the underpricing study. This study shows that shariah status leads to an overreaction, instead of a signal for quality.

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“…Reliably, we attain identical results that ensure strong confidence in our previous findings. Accounting disclosure and IPO researchers caution for the presence of endogeneity in aftermarket performance models that are probably to bias the results of OLS estimation when it is ignored (Shi et al 2013;Zattoni et al 2017;Jamaani & Ahmed 2020). This problem may be attributed to two things: firstly, the endogenous decision of IPO firms to choose prestigious underwriters; and secondly, the IPO firms' choice to self-select an exact time where they perceive an improvement of the overall formal institutional quality in a given country.…”

Section: Robustness Testsmentioning

confidence: 99%

“…However, in the secondary market, market participants face less information uncertainty concerning IPO firms compared to the primary market. This is because research indicates that investors in the secondary market can attain information from different sources about listed firms including firms' analysts' reports, historical financial reports, media coverage, and firm announcements to reduce information uncertainty (Hong et al 2014;Jamaani & Alidarous 2019;Jamaani & Ahmed 2020). In contrast, in the primairy market, the only source of infirmation investors have access to is the one provided in the IPO prospectus which is entirely governed by the issuing firm.…”

Section: Od=ajperesandconvert_to=urlandcacheid=f9c937c6-6bef-46bb-8a91-9fmentioning

confidence: 99%

The Concurrent Effects of IFRS Mandate and Formal Institutional Quality on the Aftermarket Performance of IPO Firms in Emerging Countries

Alidarous¹,

Jamaani²

2021

IJFR

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This paper provides the first empirical investigation seeking to find whether International Financial Reporting Standards (IFRS) mandate, changes in the quality of formal institutions, or, the concurrent effect of these two elements can explain the ongoing phenomenon of the aftermarket performance difference of Initial Public Offerings (IPO) firms. We perceive little awareness of the concurrent effect of IFRS mandate and the quality of formal institutions in emerging countries, although these nations account for more than half of the IFRS mandating countries. We employ numerous Difference-in-Differences (DiD) models utilizing reliable IPO and formal institutional data for Saudi Arabia from 2005 to 2017. Our empirical results show that the absence of IFRS influence in the aftermarket performance of IPO firms led us to posit that the quality of formal institutions is the key player in influencing long-term performance of IPO firms in Saudi Arabia. We uncover evidence showing that an improvement in formal institutional quality increases the long-term performance of IPO firms. We find no evidence of a concurrent effect of changes in formal institutional quality and IFRS mandate on the aftermarket performance of IPO firms. Our results show that what does really matter in relation to the aftermarket performance of IPO firms in Saudi Arabia, are the enhancements in the level of formal institutional quality. Our results provide some important implications for IFRS-IPO research.

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Simultaneous effects of clustering and endogeneity on the underpricing difference of IPO firms: A global evidence

Cited by 22 publications

References 50 publications

The single and joint effects of financial intervention policies introduced by governments and power distance culture on returns of equity markets during the COVID-19

The single and joint effects of financial intervention policies introduced by governments and power distance culture on returns of equity markets during the COVID-19

Shariah vs non-shariah IPO underpricing: evidence from Indonesia Stock Exchange

The Concurrent Effects of IFRS Mandate and Formal Institutional Quality on the Aftermarket Performance of IPO Firms in Emerging Countries

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