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Underpricing, Risk Management, Hot Issue and Crowding out Effects: Evidence From the Australian Resources Sector Initial Public Offerings

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  • Hoa Nguyen

    ()
    (School of Accounting, Economics and Finance, Deakin University, 221 Burwood Highway, Burwood VIC 3125, Australia)

  • William Dimovski

    ()
    (School of Accounting, Economics and Finance, Deakin University, Waurn Ponds VIC 3217, Australia)

  • Robert Brooks

    ()
    (Department of Econometrics and Business Statistics, Monash University, PO Box 1071, Narre Warren VIC 3805, Australia)

Abstract

The main purpose of this paper is to explore the role of risk management, speculative industry competition effect and hot issue markets. We used a sample of 260 initial public offerings (IPOs) in the Australian resource sector for the 1994–2004 period to test the underpricing effect. We do not find any evidence that risk management can reduce the uncertainty relating to the new issue and hence alleviate the extent of underpricing. A plausible explanation for this lack of evidence is the poor information content of publicly available disclosures regarding risk management activities of IPO firms. We further provide evidence that the underpricing returns for resources IPOs are not impacted upon by the strength of alternative speculative IPO markets. We also show that the degree of underpricing adjusts to both market return in the preceding three months and the average underpricing of resources IPOs in the 12 month period leading to the float which offers an explanation to the hot issue effect observed in the IPO market.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

Volume (Year): 13 (2010)
Issue (Month): 03 ()
Pages: 333-361

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Handle: RePEc:wsi:rpbfmp:v:13:y:2010:i:03:p:333-361

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Keywords: Initial public offerings; underpricing; risk management; industry competition effect; hot issue market;

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