Research Discussion Papers, Bank of Finland
No 10/2008:
The signalling hypothesis revisited: Evidence from foreign IPOs
Bill B Francis ()
, Iftekhar Hasan ()
, James R Lothian ()
and Xian Sun ()
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.
Keywords: IPO underpricing; seasoned equity offering; cross-listing; signalling hypothesis; financial market integration; market-feedback hypothesis; (follow links to similar papers)
JEL-Codes: G14; G15; G30; G32; (follow links to similar papers)
42 pages, May 6, 2008
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