A Test of the Signaling Value of IPO Underpricing with REIT Ipo-Seo Pairs

Posted: 3 Nov 1999

See all articles by Chinmoy Ghosh

Chinmoy Ghosh

University of Connecticut - Department of Finance

Raja Nag

Monmouth University - Department of Economics, Finance, and Real Estate

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law

Abstract

The asymmetric information hypothesis states that IPO underpricing signals superior firm value. During the post-IPO period, the market learns the firm's true worth such that good quality firms issue seasoned equity at favorable prices and recoup the loss sustained at IPO. Since REITs have no special incentive to issue debt because of their tax-exempt status, and since they must pay out 95% of net income as dividends, REIT managers are hard pressed to raise capital through seasoned euity. Consequently, the signaling link between IPOs and SEOs is critical for REITs. Consistent with the signaling model, we find strong evidence that (1) REITs that underprice IPOs more are likely to sell seasoned equity sooner, (2) higher IPO underpricing results in larger joint amount of capital raised through an IPO-SEO pair; and (3)firms that underprice IPOs underprice SEOs as well. IPO underpricing does not mitigate the valuation loss associated with seasoned offerings,however.

JEL Classification: G31, G32

Suggested Citation

Ghosh, Chinmoy and Nag, Raja and Sirmans, C. F., A Test of the Signaling Value of IPO Underpricing with REIT Ipo-Seo Pairs. Available at SSRN: https://ssrn.com/abstract=181611

Chinmoy Ghosh (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-3040 (Phone)
860-486-0349 (Fax)

Raja Nag

Monmouth University - Department of Economics, Finance, and Real Estate ( email )

West Long Branch, NJ 07764
United States
732-263-5344 (Phone)
732-263-5128 (Fax)

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law ( email )

Tallahasse, FL 32306
United States
850 644-4076 (Phone)

HOME PAGE: http://www.cob.fsu.edu/rmi

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