On the Extent of Negative First-Day IPO Returns

Abstract

This doctoral thesis delves into the largely uncharted territory of overpriced Initial Public Offerings (IPOs) in the U.S. market from 2000 to 2020, focusing on three distinctive investigations. Grounded in a thorough review of existing literature, an expansive database covering 2,111 IPOs is the foundation for this study. The research scrutinises the interplay between IPO mechanisms, corporate governance, firm characteristics, and market conditions, revealing several key insights.

The first investigation identifies a significant incidence of overpricing, with 21.27% of IPOs exhibiting negative first-day returns. Factors such as deal size and over-allotment shares influence this overpricing, while adjustments in offer prices amplify the likelihood of negative returns. Neither market timing nor agency issues significantly affect IPO overpricing. The second investigation reveals that overpriced and underpriced IPOs tend to underperform market benchmarks long-term, with initial performance differences eventually converging. The third exploration uncovers an elevated risk of delisting for overpriced IPOs, with firm size, underwriter reputation, and private equity involvement being critical influencing factors.

This thesis thus unfolds new insights into IPO overpricing, a phenomenon that challenges the conventional focus on positive first-day returns, offering a comprehensive understanding of its determinants and long-term implications. These findings contribute to the academic discourse on IPO dynamics and pave the way for future research in this field.