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Review of Quantitative Finance and Accounting

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01.10.2007 | Original Paper

Valuation of global IPOs: a stochastic frontier approach

verfasst von: Yue-Cheong Chan, Congsheng Wu, Chuck C. Y. Kwok

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 3/2007

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Abstract

This paper studies the impact of global offerings on US IPO firms’ offer price using the stochastic frontier approach. We find that the offer price valuation efficiency for global IPOs exceeds that of IPOs with purely domestic offers by 3.1%. In particular, the global offering approach is most appropriate to those IPO firms, which offer larger proportion of new shares to international investors, underwritten by less prestigious investment banks and with larger firm-specific return variance. Our findings are consistent with the demand inelasticity, certification effect and investor recognition arguments that account for the benefits of global offering.

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Another way to increase visibility is to cross-list shares on a foreign exchange. However, the valuation effects of overseas listing may not be too significant for US firms. For example, Fry et al. (1994) document that US firms that listed stocks on the Tokyo Stock Exchange from 1973 to 1989 experienced no significant wealth gains from the listing. According to a complete survey of the cross-listing literature by Karolyi (1998), a positive effect is often documented for foreign firms that cross-list their shares in the US markets, while the effect is insignificant for US firms cross-listing their shares abroad.

Koop and Li (2001) suggest to use the Bayesian method to solve the inconsistency problem.

Other IPO studies (e.g., Balvers 1993) have used STDR to proxy for the uncertainty of cash flow of the IPO firms.

We have used twelve year dummies for our thirteen years investigation period in order to avoid the problem of perfect multicollinearity.

The dataset we can obtain is confined to the period of 1986–1998, for a span of 13 years. Since our data period is cut off at December 1998, we are able to avoid the 1999–2000 Internet bubble period during which many IPO firms from the high tech sector were not priced according to their earning records.

In our initial sample there are 29 IPOs with offer price below $5 and 46 IPOs with offer price equals $5, therefore it is natural to set the lower limit at $5. There are four IPOs with offer price above $32 and they are sparsely distributed within the upper tail of the offering price range, thus they are also excluded from our analysis.

There are 13 IPOs with EPS below –$5 and they are sparsely distributed within the lower tail of the EPS range. We delete one IPO falling into the upper tail of the EPS range because of its unreasonable reported EPS figure ($999.9).

The discussion of the data problem contained in the SDC database can be found at, for example, http://pages.stern.nyu.edu/∼aljungqv/research.htm

It will be useful to compare the number of institutional owners between the global and domestic offering samples. Unfortunately, these data are not available to us.

An alternative approach is to include three dummy variables into the set of misvaluation factors indicating whether the IPO firm belongs to the high TRANCHE, high RANK, and high STDR category respectively. However, the RANK and STDR dummy variables in this approach will be correlated with the RANK and STDR variables in the set of pricing factors which creates a problem in the estimation.

All of the eight firm-attribute dummy variables are equal to zero for domestic offering firms when estimating the extended model. We have also estimated the extended model using only the subset of 443 global offering firms and find no qualitative difference in results.

We have also tested the certification effect hypothesis by classifying the global offering firms by MKTCAP instead of RANK, where high MKTCAP refers to those global offering firms having the top 50% market capitalization. We find the valuation efficiency of low MKTCAP firms exceeds that of high MKTCAP firms, thereby suggesting that quality certifying is more important for those smaller global offering firms.

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Titel: Valuation of global IPOs: a stochastic frontier approach
verfasst von: Yue-Cheong Chan
Congsheng Wu
Chuck C. Y. Kwok
Publikationsdatum: 01.10.2007
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 3/2007
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-007-0035-x

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