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Review of Quantitative Finance and Accounting

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01.01.2010 | Original Research

Divergence of opinion and initial public offerings

verfasst von: Hsuan-Chi Chen, Wen-Chung Guo

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2010

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Abstract

This article analyzes several IPO patterns in the framework of divergence of opinion. Considering a new industry with few publicly traded companies, the investors in this IPO market do not initially have complete knowledge about the industry, but may learn from other IPOs in the sector. Our model shows that the equilibrium is consistent with empirical evidence documented for IPO underpricing and hot issue markets. We also characterize the association between share overhang, trading volume, and IPO prices. Furthermore, we discuss the decision of going public, analyst coverage, and IPO lockup expiration in the presence of divergent opinions.

Vorheriger Artikel Trading costs and price discovery

Nächster Artikel Binary response and logistic regression in recent accounting research publications: a methodological note

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Various models have been developed to explain underpricing based on different categories of participants. Among them, Rock (1986) argues that issuers price IPOs at a discount to compensate uninformed investors for the winner’s curse problem because informed investors do not participate in bad issues but only in good issues. Derrien (2005) presents a model with information cascade in which institutional participants in an IPO market receive private signals and bullish noise traders raise the aftermarket price on the offer date.

Other related theories focusing on the role of investment banks and underwriters are Baron (1982) and Benveniste and Spindt (1989).

Other theories on capital markets addressing the difference of opinion can be found in Varian (1985, 1989), Harris and Raviv (1993), and Hong and Stein (2003).

See Fig. 1 in Miller (1977) that allows each investor to purchase only one unit of the risky asset and the discussion about the role of the minority of optimistic investors who purchase to absorb total supply.

The role of short sales constraints is especially addressed in Houge et al. (2001), who suggest that short sellers face difficulty borrowing stocks as regulations and market practices restrict. Gao et al. (2006) also discuss the influence of short sales constraint on long-run underperformance. In our model a limited amount of short sales can be allowed in a generalized framework, where an additional supply arising from the short sales can be included.

The assumptions regarding information and signals are similar to those used in Teoh and Hwang (1991, p. 287) and Biais and Gollier (1997, p. 908).

Scheinkman and Xiong (2003) present a model of price bubbles in which an asset owner has an option to sell the asset to other agents with more optimistic beliefs. In their framework, the bubble is based on the recursive expectations of traders.

The post-IPO quiet period lasts for 25 calendar days. As of July 2002, the quiet period has been prolonged to 40 days for managing underwriters including lead underwriters and co-managers.

Based on our assumption and the Bayesian rule, the probability f can be alternatively interpreted as the probability that the company is a good firm conditional on receiving positive analyst coverage. The setting of signals are also adopted similarly in Teoh and Hwang (1991) and Biais and Gollier (1997).

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Titel: Divergence of opinion and initial public offerings
verfasst von: Hsuan-Chi Chen
Wen-Chung Guo
Publikationsdatum: 01.01.2010
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 1/2010
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-009-0125-z

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