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The signalling hypothesis revisited: Evidence from foreign IPOs

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  • Francis, Bill B

    ()
    (Lally School of Management and Technology)

  • Hasan, Iftekhar

    ()
    (Rensselaer Polytechnic Institute, USA and Bank of Finland Research)

  • Lothian, James R

    ()
    (Graduate School of Business, Fordham University)

  • Sun, Xian

    ()
    (Office of the Comptroller of the Currency, USA)

Abstract

While 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.

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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 10/2008.

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Length: 42 pages
Date of creation: 06 May 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_010

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Keywords: IPO underpricing; seasoned equity offering; cross-listing; signalling hypothesis; financial market integration; market-feedback hypothesis;

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References

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Cited by:
  1. 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.
  2. Congsheng Wu, 2012. "Country risk and valuation of US-listed foreign IPOs," Managerial Finance, Emerald Group Publishing, vol. 38(10), pages 939-957, October.
  3. 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.
  4. Premti, Arjan & Madura, Jeff, 2013. "Motives and consequences of IPOs in cold periods," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 486-496.

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