Empirical Evidence on IPO-Underpricing

Table of Contents

1 INTRODUCTION

2 INITIAL PUBLIC OFFERINGS

2.1 The IPO Process

2.1.1 Institutions and Roles in IPOs

2.1.2 IPO Transactions

2.1.3 International Equity Issuing Conditions

2.2 Empirical Evidence on IPO-Underpricing

2.2.1 Definition of IPO-Underpricing

2.2.2 Evidence on Underpricing and Country Differences

2.2.3 Long-Term IPO Performance Studies

3 THEORIES EXPLAINING IPO-UNDERPRICING

3.1 Institutional Explanations

3.1.1 Reduction of Legal Liability

3.1.2 Analyst Compensation Theory

3.1.3 Banking Relationships

3.2 Models based on Ownership and Control

3.2.1 Reduced Monitoring Theory

3.2.2 Increased Monitoring Theory

3.3 Models based on Information Asymmetry

3.3.1 Information Asymmetry between Issuer and Investor

3.3.2 Information Asymmetry between Investor Groups

3.3.3 Information Asymmetry between Underwriter and Investor

3.4 Theories related to Individual Rent-Seeking Behaviour

3.4.1 Underpricing to the Benefit of the Management

3.4.2 Underpricing to the Benefit of the Underwriter

4 THE MODEL

4.1 Sample Description

4.1.1 Investigation of Data

4.1.2 Descriptive Characteristics of Sample Firms

4.2 The Regression Model

4.3 Results of the Regression Analysis

4.4 Interpretation of Regression Results

4.5 Alternative Interpretation

5 CONCLUSION

Research Objectives and Themes

This thesis investigates the phenomenon of IPO underpricing, specifically focusing on the German market. The primary objective is to evaluate established theoretical models of underpricing using an empirical regression analysis on a comprehensive dataset of 371 IPOs, while examining the influence of market phases, such as the dot-com period, and exploring behavioral finance explanations.

• Empirical analysis of IPO underpricing determinants on the Frankfurter Börse.
• Evaluation of information asymmetry and monitoring-based theoretical frameworks.
• Assessment of the impact of "hot" IPO markets and the dot-com period on initial returns.
• Testing of rational versus behavioral finance explanations for market anomalies.
• Analysis of company and transaction characteristics influencing IPO performance.

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Summary of Chapters

1 INTRODUCTION: Outlines the objective of the paper, focusing on the motives behind IPO underpricing in the German market and the structure of the analysis.

2 INITIAL PUBLIC OFFERINGS: Provides an overview of the IPO process, key participants, international issuing conditions, and empirical evidence on underpricing and long-term performance.

3 THEORIES EXPLAINING IPO-UNDERPRICING: Clusters and evaluates theoretical models, including institutional explanations, ownership/control models, information asymmetry, and rent-seeking behavior.

4 THE MODEL: Details the empirical regression model, sample description, variables used, and presents the statistical results and their interpretation.

5 CONCLUSION: Synthesizes the findings, confirming the relevance of information asymmetry and behavioral factors in explaining IPO underpricing trends.

Keywords

Initial Public Offering, IPO, Underpricing, German IPO Market, Information Asymmetry, Dot-com Period, Signalling Theory, Winner's Curse, Regression Analysis, Frankfurter Börse, Investment Banking, Behavioral Finance, Market Efficiency, Equity Issuance.

Frequently Asked Questions

What is the core subject of this thesis?

The thesis examines the phenomenon of IPO underpricing, analyzing why companies choose to offer shares at a price below their market value on the first trading day.

What are the primary themes discussed in the work?

Key themes include institutional factors, information asymmetry between various market participants, ownership and control dynamics, and the role of behavioral finance during market "hot" periods.

What is the central research question?

The research asks whether observed underpricing can be explained by established rational theories or if it requires alternative explanations rooted in behavioral finance, particularly for the dot-com period.

Which scientific method is applied?

The author uses a quantitative empirical approach, employing a linear regression model (Ordinary Least Squares) on a dataset of 371 IPOs from the Frankfurter Börse.

What is covered in the main section of the document?

The main section consists of a literature review of underpricing theories followed by a detailed description of the model, variable definitions, and the interpretation of statistical regression results.

What are the key terms that characterize this research?

Key terms include Initial Public Offering, IPO, Underpricing, Information Asymmetry, Market Efficiency, and Behavioral Finance.

How does the dot-com period influence the results?

The thesis identifies the dot-com era as a unique market phase where standard rational models struggle to explain the extreme levels of underpricing, suggesting that investor irrationality and sentiment played a significant role.

What conclusion does the author draw regarding behavioral finance?

The author concludes that while traditional models are effective for standard market conditions, behavioral finance offers a superior "alternative interpretation" for the atypical underpricing observed during the dot-com bubble.