Underpricing, Risk Management, Hot Issue and Crowding out Effects: Evidence from the Australian Resources Sector Initital Public Offerings
In this paper, we provide a comprehensive investigation of 260 initial public offerings (IPOs) in the Australian resource sector for the 1994 – 2004 period. Consistent with the existing IPO literature, we document a 16.13% underpricing return by firms in the sample. Despite the contention that risk management can reduce the uncertainty relating to the new issue and hence alleviates the extent of underpricing, we do not find any evidence in support of such contention. In addition to the conventional variables used to explain IPOs underpricing, we further provide evidence that the demand for resources IPOs is not ‘crowded-out’ by the strength of alternative IPO markets. We also show evidence that the issue price adjusts to both market return in preceding months and the average underpricing of resources IPOs in the 12 month period leading to the float which offers an explanation to the hot issue effect observed in the IPO market.
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