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Underpricing of New Equity Offerings by Privatized Firms: An International Test

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Author Info
Qi Huang
Richard M. Levich
Abstract

In this paper, we study a large sample of 507 privatization offerings from 39 countries over the period 1979-1996. Our objectives are twofold. First, we document the extent of short-run underpricing of these privatization offerings and measure their variation across countries, industries, and years, as well as drawing comparisons to private company IPOs. Second, we test alternative explanations of the determinants of short-run underpricing drawing on various models of maximizing behavior by underwriters, augmented by variables that proxy for national political objectives. Overall, we find support for elements of asymmetric information theory, investor sentiment theory and the reputation building hypothesis. With the exception of the Gini coefficient, our political proxy variables are typically not significant. Thus to a significant degree, the investment banking strategies believed to characterize IPOs of private companies in industrial countries may also play a role in the IPO strategies of state-owned-enterprises in both industrial and lesser developed economies.

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Paper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-075.

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Date of creation: 14 Sep 1999
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Handle: RePEc:fth:nystfi:99-075

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Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Web page: http://w4.stern.nyu.edu/finance/
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  1. Tinic, Seha M, 1988. " Anatomy of Initial Public Offerings of Common Stock," Journal of Finance, American Finance Association, vol. 43(4), pages 789-822, September. [Downloadable!] (restricted)
  2. Beatty, Randolph P. & Ritter, Jay R., 1986. "Investment banking, reputation, and the underpricing of initial public offerings," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 213-232. [Downloadable!] (restricted)
    Other versions:
  3. Baron, David P, 1982. " A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues," Journal of Finance, American Finance Association, vol. 37(4), pages 955-76, September. [Downloadable!] (restricted)
  4. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August. [Downloadable!] (restricted)
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  5. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212. [Downloadable!] (restricted)
  6. Michaely, Roni & Shaw, Wayne H, 1994. "The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(2), pages 279-319. [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. Perotti, Enrico C, 1995. "Credible Privatization," American Economic Review, American Economic Association, vol. 85(4), pages 847-59, September. [Downloadable!] (restricted)
  9. Carter, Richard B & Manaster, Steven, 1990. " Initial Public Offerings and Underwriter Reputation," Journal of Finance, American Finance Association, vol. 45(4), pages 1045-67, September. [Downloadable!] (restricted)
  10. Reena Aggarwal & Ricardo Leal & Leonardo Hernandez, 1993. "The Aftermarket Performance of Initial Public Offerings in Latin America," Financial Management, Financial Management Association, vol. 22(1), Spring.
  11. Ritter, Jay R., 1987. "The costs of going public," Journal of Financial Economics, Elsevier, vol. 19(2), pages 269-281, December. [Downloadable!] (restricted)
  12. Su, Dongwei & Fleisher, Belton M., 1999. "An empirical investigation of underpricing in Chinese IPOs," Pacific-Basin Finance Journal, Elsevier, vol. 7(2), pages 173-202, May. [Downloadable!] (restricted)
  13. 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)
  14. Lee, Philip J. & Taylor, Stephen L. & Walter, Terry S., 1996. "Expected and realised returns for Singaporean IPOs: Initial and long-run analysis," Pacific-Basin Finance Journal, Elsevier, vol. 4(2-3), pages 153-180, July. [Downloadable!] (restricted)
  15. Philip D. Drake & Michael R. Vetsuypens, 1993. "IPO Underpricing and Insurance Against Legal Liability," Financial Management, Financial Management Association, vol. 22(1), Spring.
  16. Koh, Francis & Walter, Terry, 1989. "A direct test of Rock's model of the pricing of unseasoned issues," Journal of Financial Economics, Elsevier, vol. 23(2), pages 251-272, August. [Downloadable!] (restricted)
  17. 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)
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  18. Muscarella, Chris J. & Vetsuypens, Michael R., 1989. "A simple test of Baron's model of IPO underpricing," Journal of Financial Economics, Elsevier, vol. 24(1), pages 125-135, September. [Downloadable!] (restricted)
  19. Roger G. Ibbotson & Jody L. Sindelar & Jay R Ritter, 1994. "The Market'S Problems With The Pricing Of Initial Public Offerings," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(1), pages 66-74. [Downloadable!] (restricted)
  20. Dewenter, Kathryn L & Malatesta, Paul H, 1997. " Public Offerings of State-Owned and Privately-Owned Enterprises: An International Comparison," Journal of Finance, American Finance Association, vol. 52(4), pages 1659-79, September. [Downloadable!] (restricted)
  21. 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)
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