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Underpricing of Initial Public Offerings: The Case of Portugal

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Author Info
Maria Borges ()

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Abstract

This paper analyzes the initial public offering (IPO) underpricing phenomenon in Portugal. We show that the ‘hot issue’ market of 1987, coinciding with a speculative bubble in the stock market, is well explained by investor sentiment theories and that the issuing firms seized a ‘window of opportunity’ provided by excessive demand to offer and list their shares. In IPOs prior to the 1987 crash, underpricing is very high while there is a strong reversion to fundamentals in the long run. In the period 1988–2004, we find lower IPO underpricing and overall no evidence of long-run underperformance of IPO firms. Bookbuilding IPOs are more underpriced than other price setting systems IPOs, and firms with seasoned public offerings show abnormal returns in the long run. Copyright International Atlantic Economic Society 2007

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File URL: http://hdl.handle.net/10.1007/s11294-006-9064-9
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Publisher Info
Article provided by Springer in its journal International Advances in Economic Research.

Volume (Year): 13 (2007)
Issue (Month): 1 (February)
Pages: 65-80
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Handle: RePEc:kap:iaecre:v:13:y:2007:i:1:p:65-80

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Web page: http://www.springerlink.com/link.asp?id=112112

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Related research
Keywords: hot-issue markets; IPO; investor sentiment; underpricing; G10; G12; G14;

References listed on IDEAS
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  1. Lerner, Joshua, 1994. "Venture capitalists and the decision to go public," Journal of Financial Economics, Elsevier, vol. 35(3), pages 293-316, June. [Downloadable!] (restricted)
  2. Francesca Cornelli & David Goldreich & Alexander Ljungqvist, 2006. "Investor Sentiment and Pre-IPO Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1187-1216, 06. [Downloadable!] (restricted)
  3. Carla Vieira & Ana Paula Serra, 2005. "Abnormal Returns in Privatization Public Offerings: The Case of Portuguese Firms," Working Papers 2005.43, Fondazione Eni Enrico Mattei. [Downloadable!]
  4. Stoughton, Neal M & Wong, Kit Pong & Zechner, Josef, 2001. "IPOs and Product Quality," Journal of Business, University of Chicago Press, vol. 74(3), pages 375-408, July. [Downloadable!] (restricted)
  5. Michelle Lowry & G. William Schwert, 2002. "IPO Market Cycles: Bubbles or Sequential Learning?," Journal of Finance, American Finance Association, vol. 57(3), pages 1171-1200, 06. [Downloadable!] (restricted)
    Other versions:
  6. Loughran, Tim & Ritter, Jay R, 1995. " The New Issues Puzzle," Journal of Finance, American Finance Association, vol. 50(1), pages 23-51, March. [Downloadable!] (restricted)
  7. Ibbotson, Roger G & Jaffe, Jeffrey F, 1975. ""Hot Issue" Markets," Journal of Finance, American Finance Association, vol. 30(4), pages 1027-42, September. [Downloadable!] (restricted)
  8. Helwege, Jean & Liang, Nellie, 2004. "Initial Public Offerings in Hot and Cold Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(03), pages 541-569, September. [Downloadable!]
  9. Ljungqvist, Alexander P & Nanda, Vikram & Singh, Rajdeep, 2001. "Hot Markets, Investor Sentiment and IPO Pricing," CEPR Discussion Papers 3053, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Alexander P. Ljungqvist & Tim Jenkinson & William J. Wilhelm, Jr., 2003. "Global Integration in Primary Equity Markets: The Role of U.S. Banks and U.S. Investors," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 16(1), pages 63-99.
    Other versions:
  11. Benveniste, Lawrence M. & Busaba, Walid Y. & Wilhelm, William Jr., 2002. "Information Externalities and the Role of Underwriters in Primary Equity Markets," Journal of Financial Intermediation, Elsevier, vol. 11(1), pages 61-86, January. [Downloadable!] (restricted)
  12. Jay R. Ritter, 2003. "Differences between European and American IPO Markets," European Financial Management, Blackwell Publishing Ltd, vol. 9(4), pages 421-434. [Downloadable!] (restricted)
  13. Amiyatosh K. Purnanandam, 2004. "Are IPOs Really Underpriced?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17(3), pages 811-848. [Downloadable!] (restricted)
  14. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1994. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, vol. 2(2-3), pages 165-199, May. [Downloadable!] (restricted)
    Other versions:
  15. Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September. [Downloadable!] (restricted)
  16. Dorn, Daniel, 2009. "Does Sentiment Drive the Retail Demand for IPOs?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 85-108, February. [Downloadable!]
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