Monash University
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Initial public offerings (IPOs): a study on the volatility of IPOs’ initial returns in selected OECD countries.

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posted on 2017-02-28, 03:58 authored by Sundarasen, Sheela Devi
An initial public offering (IPO) is a financing instrument which emerges when privately owned companies sell their stocks to the public for the very first time (Bodie et al. 2006). Anomalies surrounding the IPOs predominantly originate from the differences between an IPO’s offer price and the first day’s closing price, which is known as initial returns. This study investigates the volatility of the initial returns for 28 selected OECD countries from 2001 to 2010. Volatility in this context arises from the variability in the initial returns of a set of IPOs at any given time (Lowry, 2010). Academic literature considers volatility in the IPOs initial returns as a proxy to the price forecasting error due to asymmetric information in an IPO environment. Therefore, the primary intention of this study is to investigate the role of selected signaling variables, i.e., underwriters’ reputation, auditors’ reputation and ownership retention on the volatility of the IPOs’ initial returns in 28 OECD countries from 2001 – 2010 and further determine the moderating effects of institutional arrangements on this relationship. The institutional arrangements considered are transparency levels (proxied by Corruption Perception Index) and Country of Legal Origin (Common law vs. Non-common Law). This study seeks to contribute to the literature by analyzing the abovementioned relationship in an international setting since the issue of volatility and how it varies with the legal system of a country and the protection provided to investors remain an open question. The cross-sectional dataset used in this study adopts the Ordinary Least Square (OLS) regression method, using the multivariate regression for all the variables tested. The empirical findings can be classified into four main sections; • the basic relationship between the signaling variables (underwriters’ reputation, auditors’ reputation and ownership retention) and the volatility of IPOs’ initial returns • the interaction between the abovementioned variables and their impact on the volatility of initial returns • the moderating effect of the transparency levels of a country on the abovementioned relationships • the role of country of legal origin (common law and non-common law countries) on the above relationship The empirical evidence documents a negative relationship between underwriters’/auditors’ reputation against the volatility of the IPOs’ initial returns, whilst a positive relationship is denoted for ownership retention. In most instances, the results are not significant in the non-common law countries, suggesting that legal origin plays a pivotal role in an IPO environment. As for the interactions amongst the signaling variables, significant relationships are noted in most instances for both the common law and non-common law countries. Transparency level of a country significantly moderates the abovementioned relationships in common law countries but no significance is documented for non-common law countries except for the auditors’ reputation. The results of this study provide some insights on the signaling role of underwriters’ reputation, auditors’ reputation and ownership retention on the volatility of IPOs’ initial returns and the importance of two institutional arrangements, i.e., the country of legal origin and transparency levels of a country in an IPO environment.


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Principal supervisor

Jothee Sinnakkannu

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Doctor of Philosophy

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Faculty of Business and Economics

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