The signalling hypothesis revisited: Evidence from foreign IPOs
AbstractWhile the signalling hypothesis has played a prominent role as the economic rationale associated with the initial public offering (IPO) underpricing puzzle (Welch, 1989), the empirical evidence on it has been mixed at best (Jegadeesh, Weinstein and Welch, 1993; Michaely and Shaw, 1994). This paper revisits the issue from the vantage point of close to two decades of additional experience by examining a sample of foreign IPOs – firms from both financially integrated and segmented markets – in US markets. The evidence indicates that signalling does matter in determining IPO underpricing, especially for firms domiciled in countries with segmented markets, which as a result face higher information asymmetry and lack access to external capital markets. We find a significant positive and robust relationship between the degree of IPO underpricing and segmented-market firms’ seasoned equity offering activities. For firms from integrated markets, in contrast, the analyst-coverage-purchase hypothesis appears to matter more in explaining IPO underpricing and the aftermarket price appreciation explains these firms’ seasoned equity offering activities. The evidence, therefore, clearly supports the notion that some firms are willing to leave money on the table voluntarily to get a more favorable price at seasoned offerings when they are substantially wealth constrained, a prediction embedded in the signalling hypothesis.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 10/2008.
Length: 42 pages
Date of creation: 06 May 2008
Date of revision:
IPO underpricing; seasoned equity offering; cross-listing; signalling hypothesis; financial market integration; market-feedback hypothesis;
Other versions of this item:
- Francis, Bill B. & Hasan, Iftekhar & Lothian, James R. & Sun, Xian, 2010. "The Signaling Hypothesis Revisited: Evidence from Foreign IPOs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(01), pages 81-106, February.
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-17 (All new papers)
- NEP-CFN-2008-05-17 (Corporate Finance)
- NEP-FMK-2008-05-17 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hargis, Kent, 2000. "International cross-listing and stock market development in emerging economies," International Review of Economics & Finance, Elsevier, vol. 9(2), pages 101-122.
- Geert Bekaert & Campbell R. Harvey, 1994.
"Time-Varying World Market Integration,"
NBER Working Papers
4843, National Bureau of Economic Research, Inc.
- Hali J. Edison & Francis E. Warnock, 2001.
"A simple measure of the intensity of capital controls,"
International Finance Discussion Papers
708, Board of Governors of the Federal Reserve System (U.S.).
- Edison, Hali J. & Warnock, Francis E., 2003. "A simple measure of the intensity of capital controls," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 81-103, February.
- Francis E. Warnock & Hali J. Edison, 2001. "A Simple Measure of the intensity of Capital Controls," IMF Working Papers 01/180, International Monetary Fund.
- Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Aggregating governance indicators," Policy Research Working Paper Series 2195, The World Bank.
- Chemmanur, Thomas J, 1993. " The Pricing of Initial Public Offerings: A Dynamic Model with Information Production," Journal of Finance, American Finance Association, vol. 48(1), pages 285-304, March.
- Jegadeesh, Narasimhan & Weinstein, Mark & Welch, Ivo, 1993. "An empirical investigation of IPO returns and subsequent equity offerings," Journal of Financial Economics, Elsevier, vol. 34(2), pages 153-175, October.
- Stoll, Hans R. & Curley, Anthony J., 1970. "Small Business and the New Issues Market for Equities," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 5(03), pages 309-322, September.
- Jay Ritter & Ivo Welch, 2002.
"A Review of IPO Activity, Pricing and Allocations,"
Yale School of Management Working Papers
ysm258, Yale School of Management, revised 01 Apr 2002.
- Jay R. Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," Journal of Finance, American Finance Association, vol. 57(4), pages 1795-1828, 08.
- Jay Ritter & Ivo Welch, 2002. "A Review of IPO Activity, Pricing, and Allocations," NBER Working Papers 8805, National Bureau of Economic Research, Inc.
- Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334.
- Stephen R. Foerster & G. Andrew Karolyi, 1999. "The Effects of Market Segmentation and Investor Recognition on Asset Prices: Evidence from Foreign Stocks Listing in the United States," Journal of Finance, American Finance Association, vol. 54(3), pages 981-1013, 06.
- Michael T. Cliff & David J. Denis, 2004. "Do Initial Public Offering Firms Purchase Analyst Coverage with Underpricing?," Journal of Finance, American Finance Association, vol. 59(6), pages 2871-2901, December.
- Errunza, Vihang & Losq, Etienne, 1985. " International Asset Pricing under Mild Segmentation: Theory and Test," Journal of Finance, American Finance Association, vol. 40(1), pages 105-24, March.
- Lins, Karl V. & Strickland, Deon & Zenner, Marc, 2005. "Do Non-U.S. Firms Issue Equity on U.S. Stock Exchanges to Relax Capital Constraints?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 109-133, March.
- Welch, Ivo, 1996. "Equity offerings following the IPO theory and evidence," Journal of Corporate Finance, Elsevier, vol. 2(3), pages 227-259, February.
- Michaely, Roni & Shaw, Wayne H, 1994. "The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories," Review of Financial Studies, Society for Financial Studies, vol. 7(2), pages 279-319.
- Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
- Grinblatt, Mark & Hwang, Chuan Yang, 1989. " Signalling and the Pricing of New Issues," Journal of Finance, American Finance Association, vol. 44(2), pages 393-420, June.
- Aggarwal, Rajesh K. & Krigman, Laurie & Womack, Kent L., 2002. "Strategic IPO underpricing, information momentum, and lockup expiration selling," Journal of Financial Economics, Elsevier, vol. 66(1), pages 105-137, October.
- Lothian, James R., 2006. "Institutions, capital flows and financial integration," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 358-369, April.
- Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
- Ibbotson, Roger G., 1975. "Price performance of common stock new issues," Journal of Financial Economics, Elsevier, vol. 2(3), pages 235-272, September.
- Errunza, Vihang R. & Miller, Darius P., 2000. "Market Segmentation and the Cost of the Capital in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 577-600, December.
- Geert Bekaert & Campbell R. Harvey & Robin L. Lumsdaine, 1998.
"Dating the Integration of World Equity Markets,"
NBER Working Papers
6724, National Bureau of Economic Research, Inc.
- Gilberto Loureiro & Alvaro G. Taboada, 2013. "Equity Offerings Abroad and the adoption of IFRS: A test of the Capital Markets Liability of Foreignness," NIPE Working Papers 21/2013, NIPE - Universidade do Minho.
- Gresse, Carole & Bouzouita, Nesrine & Gajewski, Jean-François, 2012. "Liquidity Benefits from IPO Underpricing : Ownership Dispersion or Information Effect," Economics Papers from University Paris Dauphine 123456789/8776, Paris Dauphine University.
- Congsheng Wu, 2012. "Country risk and valuation of US-listed foreign IPOs," Managerial Finance, Emerald Group Publishing, vol. 38(10), pages 939-957, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman).
If references are entirely missing, you can add them using this form.