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The valuation of IPO, SEO and post-Chapter 11 firms: A stochastic frontier approach

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Author Info
Gary Koop ()
Kai Li

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Abstract

We examine the pricing of initial public offering (IPO), seasoned equity offering (SEO) and post-chapter 11 firms using a stochastic frontier methodology. The stochastic frontier framework allows us to model "inefficiency" or the difference between a firm's maximum predicted and its actual market capitalization at the time of the offering as a function of observable firm characteristics. Data for the analysis are comprised of 833 IPOs, 1,846 SEOs and 55 post-Chapter 11 firms between 1990 and 1996. At issue both the IPO and post-Chapter 11 firms are underpriced, while the SEO firms are almost efficiently priced. Furthermore, the market capitalization of an offering firm is positively related to size, sales and net income, negatively related to its debt level. Finally, offering firms tend to receive a poor market valuation in bad economic times.

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Publisher Info
Paper provided by Edinburgh School of Economics, University of Edinburgh in its series ESE Discussion Papers with number 13.

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Length: 29
Date of creation: Sep 2004
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Handle: RePEc:edn:esedps:13

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Related research
Keywords: Underpricing; Market efficiency; Bayesian Inference.;

Find related papers by JEL classification:
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Bayesian Analysis

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  1. van den Broeck, Julien & Koop, Gary & Osiewalski, Jacek & Steel, Mark F. J., 1994. "Stochastic frontier models : A Bayesian perspective," Journal of Econometrics, Elsevier, vol. 61(2), pages 273-303, April. [Downloadable!] (restricted)
  2. Koop, Gary & Osiewalski, Jacek & Steel, Mark F J, 2000. "Modeling the Sources of Output Growth in a Panel of Countries," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(3), pages 284-99, July.
  3. 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)
  4. Allan C. Eberhart & Edward I. Altman & Reena Aggarwal, 1997. "The Equity Performance of Firms Emerging from Bankruptcy," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-22, New York University, Leonard N. Stern School of Business-.
  5. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June. [Downloadable!] (restricted)
  6. Ritter, Jay R, 1991. " The Long-run Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(1), pages 3-27, March. [Downloadable!] (restricted)
  7. Koop, Gary & Osiewalski, Jacek & Steel, Mark F. J., 1997. "Bayesian efficiency analysis through individual effects: Hospital cost frontiers," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 77-105. [Downloadable!] (restricted)
  8. Fernandez, Carmen & Osiewalski, Jacek & Steel, Mark F. J., 1997. "On the use of panel data in stochastic frontier models with improper priors," Journal of Econometrics, Elsevier, vol. 79(1), pages 169-193, July. [Downloadable!] (restricted)
  9. Peter Schmidt, 1985. "Frontier production functions," Econometric Reviews, Taylor and Francis Journals, vol. 4(2), pages 289-328. [Downloadable!] (restricted)
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