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Signaling by Underpricing the Initial Public Offerings of Primary Listings in an Emerging Market

Author

Listed:
  • Ales Cornanic

    (Institute of Economic Studies at the Faculty of Social Sciences, Charles University in Prague)

  • Jiri Novak

    (Institute of Economic Studies at the Faculty of Social Sciences, Charles University in Prague)

Abstract

We show that issuers use initial public offering (IPO) underpricing to signal their quality when the a priori information asymmetry is significant. Contrary to weak evidence in the signaling hypothesis from established markets, we find that in a less transparent emerging market firms strategically underprice their IPOs to issue seasoned equity at better terms. Private firms that underpriced their primary listing in Poland between 2005 and 2009 were more likely to make follow-up seasoned equity offerings (SEOs) and their SEOs were larger and occurred sooner after the IPOs. This suggests that the economic incentives to follow the signaling strategy are stronger in opaque environments where high-quality issuers may underprice IPOs to overcome information asymmetry.

Suggested Citation

  • Ales Cornanic & Jiri Novak, 2015. "Signaling by Underpricing the Initial Public Offerings of Primary Listings in an Emerging Market," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(4), pages 307-335, August.
    • Handle: RePEc:fau:fauart:v:65:y:2015:i:4:p:307-335
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    Keywords

    initial public offering; seasoned equity offering; underpricing; signaling; information asymmetry; emerging market;
    All these keywords.

    JEL classification:

    • 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

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