IPO underpricing and overpricing and long-term firm performance in the Netherlands, United Kingdom, France, Sweden, and Italy: learning from three Dutch IPOs
DOI:
https://doi.org/10.29015/cerem.978Keywords:
Initial public offering, equity pricing, firm performance, capital markets, case studiesAbstract
Aim: This research contributes to the study of the relationship between initial public offering (IPO) under- and overpricing and long-term firm performance as measured by net income.
Research methods: Using ordinary least-squares regressions, an international sample of 444 IPOs from the United Kingdom, Sweden, France, Italy, and the Netherlands for the period 2013–2017 is analysed. The data was extracted from the Eikon Refinitiv database. Further, an in-depth analysis of three Dutch IPOs by six interviews with five (former) management members and one investment banker is conducted.
Conclusions: The results show that the more profitable a firm is in the long run, the likelier positive initial stock returns move towards zero after the first trading day. The case studies support these findings and the concept of asymmetric information between market participants can offer a partial explanation. Additionally, as firms operating in the industrial and healthcare sector grow larger, the offer price tends to be closer to the overall market demand. Nonetheless, no significant relationship is found between initial stock return and net profitability for other industries. While the country analysis also displays no significant relationship, underpricing is more prevalent in the United Kingdom than in the other sample countries.
Originality: This article combines a full-fledged quantitative study with a full-fledged qualitative study on one of the most perilous corporate finance milestones, that is, the complex transformation from a private to a public company through a stock market listing.
Limitations: The sample composition skews towards underpriced IPOs. Also, although the notion of reverse causality is discussed based on the views of interviewees, no quantitative evidence is provided.
References
Aggarwal R., Krigman L., Womack K.L. (2002), Strategic IPO Underpricing, Information Momentum, and Lockup Expiration Selling, “Journal of Financial Economics”, vol. 66 no. 1, pp. 105–137.
Allen F., Faulhaber G.R. (1989), Signalling by Underpricing in the IPO Market, “Journal of Financial Economics”, vol. 23 no. 2, pp. 303–323.
Arthurs J.D. et al. (2008), Managerial Agents Watching other Agents: Multiple Agency Conflicts Regarding Underpricing in IPO Firms, “Academy of Management Journal”, vol. 51 no. 2, pp. 277–294.
ASR (2016), ASR 9M Trading Update.
ASR (2017), ASR Annual Report 2016, https://www.asrnl.com/investor-relations/annual-reports [08.05.2023].
ASR (2023), ASR Annual Report 2022, https://www.asrnl.com/investor-relations/annual-reports [08.05.2023].
Baron D. (1982), A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues, “Journal of Finance”, vol. 37 no. 4, pp. 955–976.
Benveniste L.M., Spindt P.A. (1989), How Investment Bankers Determine the Offer Price and Allocation of New Issues, “Journal of Financial Economics”, vol. 24 no. 2, pp. 343–361.
Binay M., Gatchev V.A., Pirinsky C.A. (2007), The Role of Underwriter-Investor Relationships in the IPO Process, “Journal of Financial and Quantitative Analysis”, vol. 42 no. 3, pp. 785–809.
Boujelbene Y., Besbes L. (2012), The Determinants of Information Asymmetry between Managers and Investors: A Study on Panel Data, IBIMA Business Review, pp. 1–11.
Bouzouita N., Gajewski J.-F., Gresse C. (2015), Liquidity Benefits from IPO Underpricing: Ownership Dispersion or Information Effect, “Financial Management”, vol. 44 no. 4, pp. 785–810.
Chae J.-S. (2005), Trading Volume, Information Asymmetry, and Timing Information, “Journal of Finance”, vol. 60 no. 1, pp. 413–442.
Chang C.-Y. et al. (2016), Pre-Market Trading and IPO Pricing, “Review of Financial Studies”, vol. 30 no. 3, pp. 835–865.
Chourou L., Saadi S., Zhu H. (2018), How Does National Culture Influence IPO Underpricing?, “Pacific-Basin Finance Journal”, vol. 51 no. 1, pp. 318–341.
Cliff M.T., Denis D.J. (2004), Do Initial Public Offering Firms Purchase Analyst Coverage with Underpricing?, “Journal of Finance”, vol. 59 no. 6, pp. 2871–2901.
Dang C., Li Z., Yang C. (2017), Measuring Firm Size in Empirical Corporate Finance, “Journal of Banking and Finance”, vol. 86 no. 1, pp. 159–176.
Demsetz H. (1986), Corporate Control, Insider Trading, and Rates of Return, “The American Economic Review”, vol. 76 no. 2, pp. 313–316.
Derrien F., Womack K.L. (2003), Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets, “Review of Financial Studies”, vol. 16 no. 1, pp. 31–61.
Dietrich J. (2012), Variables Influencing the Severity of IPO Underpricing: An Empirical Analysis of the German Market, Diplomica Verlag, Hamburg.
Ellul A., Pagano M. (2006), IPO Underpricing and After-Market Liquidity, “Review of Financial Studies”, vol. 19 no. 2, pp. 381–421.
Flow Traders (2015–2022), Flow Traders Prospectus.
Flow Traders (2018), Flow Traders Completes 2018 Employee Equity Participation Plan, press release, https://www.flowtraders.com/sites/flowtraders-corp/files/881078.pdf [12.05.2023].
Flow Traders (2021), Annual Report 2020, https://www.flowtraders.com/sites/flowtraders-corp/files/flowtraders/investor-relations/agm/annual-report-2020.pdf [12.05.2023].
Flow Traders (2023a), ETP Market Update – March 2023 [16.05.2023].
Flow Traders (2023b), Annual Report 2022, https://www.flowtraders.com/sites/flowtraders-corp/files/Investor%20Relations/Annual%20Report/annual-report-flow-traders-2022.pdf [16.05.2023].
GrandVision (2015), GrandVision Prospectus, https://investors.grandvision.com/static-files/9356f44b-eb9a-4594-b4a3-fde10d3738da [01.05.2023].
GrandVision (2017), GrandVision Annual Report 2016, https://annualreport2017.grandvision.com [27.04.2023].
GrandVision (2020), GrandVision Annual Report 2019, https://annualreport2019.grandvision.com [27.04.2023].
GrandVision (2021), GrandVision Annual Report 2020, https://annualreport.grandvision.com [27.04.2023].
HAL (2015), HAL Annual Report 2014, https://www.halholding.com/annual-and-half-year-reports [03.05.2023].
Hofstede G.J., Minkov M. (2010), Cultures and Organizations, Software of the Mind: Intercultural Cooperation and Its Importance for survival, McGraw-Hill eBooks.
Hsu H.-C., Reed A.V., Rocholl J. (2010), The New Game in Town: Competitive Effects of IPOs, “Journal of Finance”, vol. 65 no. 2, pp. 495–528.
Ibbotson R.G. (1975), Price Performance of Common Stock New Issues, “Journal of Financial Economics”, vol. 2 no. 3, pp. 235–272.
IPO Data – Jay R. Ritter. (2023), https://site.warrington.ufl.edu/ritter/ipo-data/ [16.04.2023].
Jamaani F., Alidarous M. (2019), Review of Theoretical Explanations of IPO Underpricing, “Journal of Accounting, Business and Finance Research”, vol. 6 no. 1, pp. 1–18.
KPMG (2022), Analysis of the Insurance Market in the Netherlands 2021 [04.05.2023].
Logue D.E. (1973), On the Pricing of Unseasoned Equity Issues: 1965–1969, “Journal of Financial and Quantitative Analysis”, vol. 8 no. 1, p. 91–103.
Loughran T., Ritter J.R. (2002), Why Don’t Issuers Get Upset About Leaving Money on the Table in IPOs?, “Review of Financial Studies”, vol. 15 no. 2, pp. 413–444.
Lowry M., Officer M.S., Schwert G.W. (2010), The Variability of IPO Initial Returns, “Journal of Finance”, vol. 65 no. 2, pp. 425–465.
Merriam S.B. (1998), Qualitative Research and Case Study Applications in Education: Revised and Expanded from Case Study Research in Education, Jossey-Bass, Hoboken.
Merton R.C. (1987), A Simple Model of Capital Market Equilibrium with Incomplete Information, “Journal of Finance”, vol. 42 no. 3, pp. 483–510.
NLFI (2017), NL Financial Investments Press Release Update [04.05.2023].
Pham P.K., Kalev P.S., Steen A. (2003), Underpricing, Stock Allocation, Ownership Structure and Post-Listing Liquidity of Newly Listed Firms, “Journal of Banking and Finance”, vol. 27 no. 5, pp. 919–947.
Purnanandam A., Swaminathan B. (2004), Are IPOs Really Underpriced?, “Review of Financial Studies”, vol. 17 no. 3, pp. 811–848.
Rathnayake D.N. et al. (2019), Are IPOs Underpriced or Overpriced?: Evidence from an emerging market, “Research in International Business and Finance”, vol. 50 no. 1, pp. 171–190.
Reilly F.K. (1973), Further Evidence on Short-Run Results for New Issue Investors, “Journal of Financial and Quantitative Analysis”, vol. 8 no. 1, pp. 83–90.
Ritter J.R. (1984), The ‘Hot Issue’ Market of 1980, “The Journal of Business”, vol. 57 no. 2, pp. 215–240.
Ritter J.R., Welch I. (2002), A Review of IPO Activity, Pricing, and Allocations, “Journal of Finance”, vol. 57 no. 4, pp. 1795–1828.
Rock K. (1986), Why New Issues Are Underpriced, “Journal of Financial Economics”, vol. 15 no. 1–2, pp. 187–212.
Stoll H.R., Curley A.J. (1970), Small Business and the New Issues Market for Equities, “Journal of Financial and Quantitative Analysis”, vol. 5 no. 3, pp. 309–322.
Welch I. (1989), Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings, “Journal of Finance”, vol. 44 no. 2, pp. 421–449.
Yazan B. (2015), Three Approaches to Case Study Methods in Education: Yin, Merriam, and Stake, “The Qualitative Report”, vol. 20 no. 2, pp. 134–152.
Zhou X., Tang X., Wu S.W. (2021), The Impact of National Culture on IPO Underpricing and Its Influence Mechanism: A Cross-Border Empirical Research, “Finance Research Letters”, vol. 47 part A, art. 102543.
Downloads
Published
Issue
Section
License
Copyright (c) 2023 WSB Merito University in Wroclaw
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
The aim of CEREM is to make scientific work available in accordance with the principle of open access. The rules mentioned below are important, as they enable CEREM and its publisher, the WSB Merito University in Wroclaw, to distribute the scientific work to a wide public while complying with specific legal requirements, at the same time protecting the rights of the authors.
The author transfers to the WSB Merito University in Wroclaw, free of charge and without territorial limitations, with all proprietary copyrights to the said piece of work in the understanding of the act of 4th February 1994 on copyrights and derivative rights (Journal of Laws of 1994, no. 24, item 83, as amended) on an exclusivity basis, i.e. the rights to:
1. Make the piece of work in question available via the Digital Library established by the WSB Merito University in Wroclaw.
2. Produce, record and reproduce in multiple copies the piece of work using any techniques whatsoever, including printing, reprography, magnetic recording and digital processing, and particularly its reproduction by recording on CDs and similar data carriers,
3. Use fragments of the piece of work for promotional purposes in publications, promotional materials, the Internet and Intranet type networks managed by the WSB Merito University in Wroclaw.
4. Store the piece of work into computer databases managed by the WSB Merito University in Wroclaw.
5. Copy and reproduce the piece of work using photo-mechanic technologies other than those commonly known at the time of the signature hereof (photocopies, Xerox copies etc.),
6. Process the piece of work, transferring it into an electronic form, and distribute it on the Internet without limitations.
