The Incremental Value Relevance of Firm Specific Risk Measures in Pricing Junk IPOs

Posted: 10 Aug 2008 Last revised: 4 Jan 2019

See all articles by Ehsan H. Feroz

Ehsan H. Feroz

University of Washington, Milgard School of Business-Accounting ; University of Illinois at Urbana-Champaign; Government of the United States of America - US GAO Advisory Council; University of Minnesota, Labovitz School of Business-Department of Accounting; University of Minnesota, Carlson School of Management-Department of Accounting; American Accounting Association

Jarrod Johnston

Appalachian State University - Department of Finance

Jacqueline Reck

University of South Florida - College of Business Administration

Earl R. Wilson

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Date Written: 2006

Abstract

This is the first published study, to our best best knowledge, to look at the junk IPOs in a systematic manner using a quasi-experimental design. The study abandons the notion of homogeneous market for IPOs, and instead focuses on the differential demand for information across identifiable segments of the IPO market in the pre-market offering period leading to the first day closing prices.

We found that firm-specific risk measures are associated with the initial trading day return for IPOs managed by low reputation underwriters, and not for those managed by high reputation underwriters. However, as expected, these risk measures are impounded in initial trading day returns only for a sub-sample of high-risk junk IPOs that were marked down in price by the underwriters prior to the offering in order to make them more attractive to investors.

Our findings suggest that ex-ante risk measures are useful in picking among junk IPOs those with the best chances of survival, and thus earning an initial trading day return on those IPOs.

Keywords: Junk IPOs, Risk, Underwriter reputation, Segmentation, First day closing price, Political Economy

JEL Classification: C1, G1, G2, G3, L61, M1, M4

Suggested Citation

Feroz, Ehsan H. and Johnston, Jarrod and Reck, Jacqueline and Wilson, Earl R., The Incremental Value Relevance of Firm Specific Risk Measures in Pricing Junk IPOs (2006). Review of Accounting and Finance, Vol. 5, No. 3, pp. 251-267, 2006 . Available at SSRN: https://ssrn.com/abstract=1213342

Ehsan H. Feroz (Contact Author)

University of Washington, Milgard School of Business-Accounting ( email )

1900 Commerce Street, Campus Box 358420
Tacoma, WA 98402-3100
United States
(253) 692 4728 (Phone)
253 692 4523 (Fax)

HOME PAGE: http://www.tacoma.washington.edu/business

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive# 2307
Champaign, IL 61820
United States

Government of the United States of America - US GAO Advisory Council ( email )

441 G Street NW
Washington, DC 20548-0001
United States

University of Minnesota, Labovitz School of Business-Department of Accounting ( email )

10 University Drive
Labovitz School of Business
Duluth, MN 55812
United States
218-726-6988 (Phone)
218-726-8510 (Fax)

University of Minnesota, Carlson School of Management-Department of Accounting ( email )

420 Delaware St. SE
Minneapolis, MN 55455
United States

American Accounting Association ( email )

5717 Bessie Drive
Sarasota, FL 34233-2399
United States

Jarrod Johnston

Appalachian State University - Department of Finance

Boone, NC 28608
United States

Jacqueline Reck

University of South Florida - College of Business Administration ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Earl R. Wilson

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

School of Accountancy
Columbia, MO 65211
United States
573-882-3225 (Phone)
573-882-2437 (Fax)

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