Investor Interest, Trading Volume, and the Choice of Ipo Mechanism in France

International Review of Financial Analysis 16 (2007) 116 – 135

Investor interest, trading volume, and the choice of IPO mechanism in France
Salim Chahine *
American University of Beirut, The Suliman S. Olayan School of Business, Bliss Street, P.O.Box: 11-0236, Beirut, Lebanon Received 3 February 2004 Available online 7 November 2005

Abstract This paper investigates the relationship between underpricing and investor interest level prior to and after the IPO date. Empirical tests show a significant 3-day buy-and-hold abnormal return of 19.15%. It is positively related to the share demand-to-offer ratio in the pre-market period and to trading volume in the aftermarket. Despite a high initial underpricing for some book-built issues, the book-building procedure allows for more effective pricing and a lower divergence of opinion among investors in the aftermarket than the auction-like procedure. D 2005 Elsevier Inc. All rights reserved.
JEL classification: G24; G28; G32 Keywords: IPO mechanisms; Underpricing; Share demand-to-offer ratio; Trading volume

1. Introduction The price setting process for initial public offerings (IPOs) is one of the most puzzling phenomena in finance. Prior empirical studies propose that investors participate in initial public offerings at an offer price lower than their own value expectations. Accordingly, there is international evidence about a significant positive abnormal return at the IPO date, usually called undepricing (Loughran, Ritter, & Rydqvist, 1994). The stimulation of investor interest is a central issue in the success of an IPO. Firms looking to attract investors thus have to accept underpricing when going public. Within this framework,

* Tel.: [phone]x3722. E-mail address: [e-mail]. 1057-5219/$ - see front matter D 2005 Elsevier Inc. All rights reserved. doi:10.1016/j.irfa.2005.10.002

S. Chahine / International Review of Financial Analysis 16 (2007) 116–135

117

this paper

References: Beatty, R., & Ritter, J. R. (1986). Investment banking, reputation, and the underpricing of initial public offerings. Journal of Financial Economics, 15, 213 – 232. Beaver, W. H. (1968). The information content of annual earnings announcements. Empirical Research in Accounting. Selected Studies (a supplement of the Journal of Accounting Research), 67 – 92. Benveniste, L., & Spindt, P. (1989). How investment bankers determine the offer price and allocation of new issues. Journal of Financial Economics, 24, 343 – 361. Benveniste, L., & Wilhelm, W. J. (1990). A comparative analysis of IPO proceeds under alternative regulatory environments. Journal of Financial Economics, 28, 173 – 208. Biais, B., & Faugeron-Crouzet, A. M. (2001). IPO auctions: English, Dutch,. . .French and internet. Journal of Financial Intermediation, 11, 9 – 36. Chahine, S. (2003). Ex-ante uncertainty and gross spreads for small and medium sized IPOs. Working paper, Nantes School of Management. Derrien, F., & Womack, K. L. (2003). Auctions vs. book-building and the control of underpricing. Review of Financial Studies, 16, 31 – 61. Faugeron-Crouzet, A. M. (2001). Les procedures d’introduction en bourse en France. Banque and Marches, 55, 21 – 30. ´ ´ Habib, M., & Ljungqvist, A. (2001). Underpricing and entrepreneurial wealth losses in IPOs: Theory and evidence. Review of Financial Studies, 14, 433 – 458. Karpoff, J. M. (1986). A theory of trading volume. Journal of Finance, 41, 1069 – 1087. S. Chahine / International Review of Financial Analysis 16 (2007) 116–135 135 Keloharju, M. (1993). The winner’s curse, legal liability, and the long-run price performance of initial public offerings in Finland. Journal of Financial, 251 – 277. Koh, F., & Walter, T. (1989). A direct test of Rock model of the pricing of unseasoned issues. Journal of Financial Economics, 23, 251 – 272. Leland, H. E., & Pyle, D. H. (1977). Informational asymmetries, financial structure, and financial intermediation. Journal of Finance, 32, 371 – 387. Levis, M. (1990). The winner’s curse problem, interest costs and the underpricing of initial public offerings. The Economic, 76 – 89. Loughran, T., Ritter, J., & Rydqvist, K. (1994). The initial public offering: International insights. Pacific Basin Finance Journal, 2, 165 – 199. Miller, R. E., & Reilly, K. (1987). An examination of mispricing, returns, and uncertainty for initial public offerings. Financial Management, 16, 33 – 38. Reese, W. A., (1998). IPO underpricing, trading volume, and investor interest. Working Paper, Tulane University. Rock, K. (1986). Why new issues are underpriced? Journal of Financial Economics, 15, 187 – 212. Sherman, A. E. (2000). IPOs and long term relationships: An advantage of book building. Review of Financial Studies, 13, 697 – 714. Sherman, A. E., (2001). Global trends in IPO methods: Book building vs. auctions. Working Paper, University of Notre Dame. Shleifer, A. (1986). Do demand curves for stocks slope down? Journal of Finance, 41, 579 – 590. Welch, I. (1992). Sequential sales, learning, and cascades. Journal of Finance, 47, 695 – 732. White, H. (1980). A heteroskedasticity-consistent co-variance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48, 817 – 838.