Underpricing and voluntary disclosure: The case of mining IPOs in Australia
DOI:
https://doi.org/10.18533/jefs.v3i02.153Keywords:
First-day returns, IPOs, Voluntary disclosure.Abstract
We study the extent to which voluntary disclosure of information in IPO prospectuses of mining companies is associated with lower IPO underpricing. We study the disclosure of information at IPO, looking at the IPO prospectus which is the fundamental document providing investors with information about the company. While its format and main contents are largely fixed by law, there is considerable scope for voluntary disclosure. Mining is a highly capital intensive endeavor and access to equity capital is a key requirement for the development of a mine. We find that the quality of information disclosure, as well as the characteristics of the mining companies, indeed affects underpricing.
References
Abody, D., and Lev, B., (2000). Information asymmetry, R&D, and insider gains. Journal of Finance, 55 (6): 2747-66. http://dx.doi.org/10.1111/0022-1082.00305
Allen, F., and Fauhlhaber, G., (1989). Signalling by underpricing in the IPO market. Journal of Financial Economics, 23 (2): 303-24. http://dx.doi.org/10.1016/0304-405X(89)90060-3
Baiman, S., and Verrecchia, R., (1996). The relation between capital markets, financial disclosure, production efficiency, and insider trading. Journal of Accounting Research, 34 (1): 1-22. http://dx.doi.org/10.2307/2491329
Baron, D., (1982). A model of the demand for investment banking advising and distribution services for new issues. Journal of Finance, 37 (3): 955-76. http://dx.doi.org/10.1111/j.1540-6261.1982.tb03591.x
Beatty, R. P., Ritter, J. R., (1986). Investment banking, reputation and the underpricing of Initial public offerings. Journal of Financial Economics, 15: 212-232. http://dx.doi.org/10.1016/0304-405X(86)90055-3
Beatty, R., and Welch, I., (1996). Issuer expenses and legal liability in initial public offerings. Journal of Law and Economics, 39 (4): 545-602. http://dx.doi.org/10.1086/467359
Benveniste, L., and Spindt, P., (1989). How investment bankers determine the offer price and allocation of new issues. Journal of Financial Economics, 24 (2): 343-61. http://dx.doi.org/10.1016/0304-405X(89)90051-2
Benveniste, L., and Wilhelm, W., (1990). A comparative analysis of IPO proceeds under alternative regulatory environment. Journal of financial economics, 28 (1): 173-208. http://dx.doi.org/10.1016/0304-405X(90)90052-2
Benveniste, L., Ljungqvist, A., Wilhelm, W., and Yu, X., (2003). Evidence of information spillovers in the production of investment banking services. Journal of Finance, 58 (2): 577-608. http://dx.doi.org/10.1111/1540-6261.00538
Booth, J. R., Smith, R. L., (1986). Capital raising, underwriting and the certification hypothesis. Journal of Financial Economics, 15(1): 261-281. http://dx.doi.org/10.1016/0304-405X(86)90057-7
Booth, L. C., (2014). Do underwriters efficiently set first-trade prices in IPOs? International Journal of Finance and Banking, 1(03), 30-44.
Botosan, C., (1997). Disclosure level and the cost of equity capital. The Accounting Review, 72(3):323-349
Botosan, C., and Plumlee, M., (2002). A re-examination of disclosure level and expected cost of equity capital. Journal of Accounting Research, 40 (1): 21-40. http://dx.doi.org/10.1111/1475-679X.00037
Bottazzi, Laura, M. Da Rin, (2014). Voluntary information disclosure at IPO, mimeo
Brailsford, T. J., Heaney, R. A., Shi, J., (2001). The cyclical behaviour of the IPO market in Australia. the Australian National University Working Paper Series in Finance, 3.
Brooks, R., Dimovski, W., (2003). Hot Issues, new economy stocks and Australian industry IPO returns in the late 1990s. International Journal of Knowledge, Culture and Change Management, 3:1-4
Certo, S. T., Daily, C. M., & Dalton, D. R., (2001). Signalling firm value through board structure: an investigation of initial public offerings. Entrepreneurship Theory and Practice, 26(2): 33–50.
Chemmanur, T., (1993). The pricing of initial public offerings: a dynamic model with information production. Journal of Finance, 48 (1): 285-304. http://dx.doi.org/10.1111/j.1540-6261.1993.tb04710.x
Core, J., (2001). A review of the empirical disclosure literature: discussion. Journal of Accounting and Economics, 31 (2): 441-56. http://dx.doi.org/10.1016/S0165-4101(01)00036-2
Diamond, W.D and Robert Verrecchia, (1991). Disclosure, liquidity, and the cost of capital. The Journal of Finance, 46 (4): 1325-1359. http://dx.doi.org/10.1111/j.1540-6261.1991.tb04620.x
Dimovski, W., Brooks, R., (2004). Initial public offerings in Australia 1994 to 1999, Recent Evidence of Underpricing and Underperformance. Review of Qualitative Finance and Accounting, 22: 179-198. http://dx.doi.org/10.1023/B:REQU.0000025759.39918.89
Dimovski, W., Brooks, R., (2005). Characteristics and underpricing of Australian mining and energy IPOs from 1994 to 2001. in 3rd Financial markets Asia-pacific Conference 2005, Australasian Finance Group, Sydney, N.S.W., pp. 1-17. http://dx.doi.org/10.1016/j.ribaf.2006.11.002
Dimovski, W., Brooks, R., (2008). The underpricing of gold mining initial public offerings. Research in International Business and Finance, 22: 1-16.
Dimovski, W., Philavanh, S., Brooks, R., (2011). Underwriter reputation and underpricing: evidence from the Australian IPO market. Review of Quantitative Finance and Accounting, 37: 409-426. http://dx.doi.org/10.1007/s11156-010-0211-2
Derrien, F., (2005). IPO pricing in “hot” market conditions: who leaves money on the table? Journal of Finance, 60: 487-771. http://dx.doi.org/10.1111/j.1540-6261.2005.00736.x
Dunbar, C., (1995). The use of warrants as underwriter compensation in initial public offerings. Journal of Financial Economics, 38: 59-78. http://dx.doi.org/10.1016/0304-405X(94)00805-B
Ellul, Andrew, and Marco Pagano, (2006). IIPO underpricing and after-market liquidity,. Review of Financial Studies, 19 (2): 381-421. http://dx.doi.org/10.1093/rfs/hhj018
Gompers, P.A., (1996). Grandstanding in the venture capital industry. Journal of Financial Economics, 42: 133-156. http://dx.doi.org/10.1016/0304-405X(96)00874-4
Habib, M. A., Ljungqvist, A. P., (1998). Underpricing and IPO proceeds: a note. Economic Letters, 61: 381-383. http://dx.doi.org/10.1016/S0165-1765(98)00201-8
Habib, M. A., Ljungqvist, A. P., (2001). Underpricing and entrepreneurial wealth losses in IPO: theory and evidence. Journal of financial Studies, 14: 433-458.
Hanley, K., Hoberg, G., (2010). The information content of IPO prospectuses. Review of Financial Studies 23: 2821–2864. http://dx.doi.org/10.1093/rfs/hhq024
Healey, Paul, and Krishna Palepu, (2001). Information asymmetry, information disclosure, and the capital markets: a review of the empirical disclosure literature, Journal of Accounting and Economics, 31 (2): 405-40. http://dx.doi.org/10.1016/S0165-4101(01)00018-0
How, J. C. Y., Izan, H. Y., Monroe, G. S., (1995). Differential information and underpricing of initial public offerings. Accounting and Finance, 35(1): 87-105. http://dx.doi.org/10.1111/j.1467-629X.1995.tb00278.x
How, J. C. Y., (2000). Initial and long-run performance of mining IPOs in Australia. Australian Journal of Management, 2: 235-272. http://dx.doi.org/10.2139/ssrn.224419
Ibbotson, R. G., (1975). Price performance of common stock new Issues. Journal of Financial Economics, 2(3): 235-272. http://dx.doi.org/10.1016/0304-405X(75)90015-X
Ibbotson, R. G. & Jaffe, J., (1975). ‘Hot issue’ markets. Journal of Finance, 30(4): 1027-1042. http://dx.doi.org/10.1111/j.1540-6261.1975.tb01019.x, http://dx.doi.org/10.2307/2326721
Jensen, Michael, and William Mackling, (1976). Theory of the firm: managerial behaviour, agency costs, and ownership structure. Journal of Financial Economics, 3 (4): 305--50. http://dx.doi.org/10.1016/S0022-5193(76)80085-9
Lee, P. J., Taylor, S. L., Walter T. S. IPO, (1999). Underpricing explanations: implications from investor application and allocation schedules. The Journal of Financial and Quantitative Analysis, 34(3): 425-444. http://dx.doi.org/10.2307/2676228
Leland, H.E., Pyle, D. H., (1977). Informational asymmetries, financial structure, and financial intermediation. The Journal of Finance, 32(2): 371-387. http://dx.doi.org/10.2307/2326770
Leuz, C., (2003). IAS vs. US GAAP: information asymmetry-based evidence from Germany’s new market, Journal of Accounting Research, 41(3): 445-472. http://dx.doi.org/10.1111/j.1475-679X.2003.00111.x
Leuz, C., and Verrecchia, R., (2000). The economic consequences of increased disclosure. Journal of Accounting Research, 38 (S): 91-124.
Ljungqvist, A., (2007). IPO underpricing, in Espen Eckbo (ed.) Handbook in Corporate Finance: Empirical Corporate Finance, Amsterdam, North Holland, 375-418. http://dx.doi.org/10.1016/B978-0-444-53265-7.50021-4
Ljungqvist, A., Jenkinson, T., and Wilhelm, W., (2003). Global integration in primary equity: the role of US banks and US investors. Review of Financial Studies, 16 (1): 63-99. http://dx.doi.org/10.1093/rfs/16.1.63, http://dx.doi.org/10.1093/rfs/16.1.0063
Ljungqvist, A., Nanda, V., & Singh, R. (2006). Hot Markets, Investor Sentiment, and IPO Pricing*. The Journal of Business, 79(4), 1667-1702. http://dx.doi.org/10.1086/503644
Ljungqvist, A., & Wilhelm, W. J., (2003). IPO pricing in the dot-com bubble. Journal of Finance, 58 (2): 723-752.
Loughran, T., and McDonald, B., (2013). IPO first-day returns, offer price revisions, volatility, and form S-1 language, Journal of Financial Economics, 109: 307-326. http://dx.doi.org/10.1016/j.jfineco.2013.02.017
Loughran, T., Ritter, J., (2004). Why has IPO underpricing changed over time?. Financial Management, 33(3): 5-37. http://dx.doi.org/10.1016/0927-538X(94)90016-7
Loughran, T., Ritter, J., Rydqvist, K., (1994). Initial public offerings: international insights. Pacific Basin Finance Journal, 2: 165-199.
Rajan, R., and Zingales, L, (1998). Financial dependence and growth. American Economic Review, 88 (3): 556-89.
Ritter, J., (1984). The 'hot issue' market of 1980. Journal of Business, 57(2): 215-240. http://dx.doi.org/10.1086/296260
Ritter, J, (1987). The costs of going public. Journal of Financial Economics, 19 (2):269-282. http://dx.doi.org/10.1016/0304-405X(87)90005-5
Ritter, J., (2003). Differences between European and American IPO markets. European Financial Management, 9(4): 421-434. http://dx.doi.org/10.1111/1468-036X.00230
Ritter, J., and Welch, I., (2002). A review of IPO activity, pricing, and allocations. Journal of Finance, 57 (4):1795:1800. http://dx.doi.org/10.1111/1540-6261.00478, http://dx.doi.org/10.2139/ssrn.296393
Rock, K., (1986). Why new Issues are underpriced. Journal of Financial Economics, 15: 187-212. http://dx.doi.org/10.1016/0304-405X(86)90054-1
Schrand, C., and Verrecchia, R., (2005). Information disclosure and adverse selection explanations for IPO underpricing, mimeo, The Wharton School.
Shelly, S., B., (2008). Oversubscription and IPO underpricing: evidence from India. The ICFAI Journal of Applied Finance, 14: 65-73.
Verrecchia, R., 2001. Essays on disclosure, Journal of Accounting and Economics, 32 (1):97-180. http://dx.doi.org/10.1016/S0165-4101(01)00025-8
Welch, I., (1989). Seasoned offerings, imitation costs, and the underpricing of initial public offerings. Journal of Finance, 44 (1): 343-61. http://dx.doi.org/10.1111/j.1540-6261.1989.tb05064.x
Welch, I., (1992). Sequential sales, learning, and cascades. Journal of Finance, 47 (2): 695-32. http://dx.doi.org/10.1111/j.1540-6261.1992.tb04406.x
Downloads
Published
Issue
Section
License
Authors who publish with this journal agree to the following terms:
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) after official publication, as it can lead to productive exchanges as well as greater citation of published work (See The Effect of Open Access).
