Signaling by Underpricing the Initial Public Offerings of Primary Listings in an Emerging Market

51 Pages Posted: 5 Jun 2013 Last revised: 17 Jul 2013

See all articles by Ales Cornanic

Ales Cornanic

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Jiri Novak

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic

Date Written: July 17, 2013

Abstract

The signaling hypothesis suggests that firms have incentives to underprice their initial public offerings (IPOs) to signal their quality to the outside investors and to issue seasoned equity (SEO) at more favorable terms. While the initial empirical evidence on the signaling hypothesis was weak, Francis et al. (2010) show that foreign firms from segmented (rather than integrated) markets strategically underprice their IPO in U.S. markets to distinguish themselves from the weaker players. Hence, the attractiveness of the signaling strategy seems to be related to the a priori level of information asymmetry. We examine the use of signaling in an emerging market where the information asymmetry is likely to be higher relative to an established market. Using a sample of 158 Polish IPOs from 2005 – 2009, we show that firms that underprice their IPOs are more likely (i) to issue seasoned equity, (ii) to issue a larger portion of equity at the SEO, and (iii) to make the SEO sooner after the IPO, all of which are consistent with the signaling hypothesis. This evidence suggests that the results of Francis et al. (2010) are not limited to IPOs made by foreign firms in an established market, but they can be extended to primary listings by domestic firms in markets where the information asymmetry is sufficiently large for the benefit of the signal to outweigh its cost.

Keywords: initial public offering, seasoned equity offering, underpricing, signaling, emerging market, Poland

JEL Classification: G14, G15, G30

Suggested Citation

Cornanic, Ales and Novak, Jiri, Signaling by Underpricing the Initial Public Offerings of Primary Listings in an Emerging Market (July 17, 2013). Available at SSRN: https://ssrn.com/abstract=2273470 or http://dx.doi.org/10.2139/ssrn.2273470

Ales Cornanic

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

Opletalova 21
Prague 1, 110 00
Czech Republic

Jiri Novak (Contact Author)

Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Czech Republic ( email )

Opletalova 1606/26
Praha 1, 11000
Czech Republic
+420 222 112 314 (Phone)

HOME PAGE: http://ies.fsv.cuni.cz/cs/staff/novakji

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