The Phenomenon of IPO Underpricing in the European and U.S. Stock Markets

Master's Thesis, 2013

102 Pages, Grade: 2.3


Table of Contents

List of Abbreviations

List of Tables

List of Figures

List of Appendices

1 Introduction
1.1 Problem Statement
1.2 Methodological Approach

2 Initial Public Offerings
2.1 The IPO
2.1.1 Typology and Motivation
2.1.2 Disadvantages
2.2 Going Public
2.2.1 The IPO Process Phase I: Preparation of the IPO Phase II: Structuring & Valuation Phase III: Marketing & Roadshow Phase IV: Pricing & Trading
2.3 Exchange Listing
2.3.1 Requirements in Europe
2.3.2 Requirements in the U.S

3 IPO Underpricing
3.1 Definition
3.2 Motivation and Impact
3.2.1 Information Asymmetry Between Groups of Investors Between Underwriter and Investors Between Underwriter and Issuer Between Issuer and Investors
3.2.2 Institutional Explanations
3.2.3 Ownership and Control models
3.2.4 Behavioral Explanations

4 Evidence of IPO Underpricing
4.1 The European Stock Market
4.1.1 Data Base and Descriptive Statistics
4.1.2 Interpretation
4.2 The U.S. Stock Market
4.2.1 Data Base and Descriptive Statistics
4.2.2 Interpretation
4.3 Consequences

5 Conclusion



Statutory Declaration

List of Abbreviations

illustration not visible in this excerpt

List of Tables

Table 2-1: Distribution of IPOs by industry and the incidence of SME-conducted IPOs in European markets from 1995 to 2008

Table 2-2: Key differences between the Main Market and AIM

Table 2-3: Key differences between the Eurolist, Alternext and Free Market

Table 2-4: Key differences between the Regulated Market and the Open Market

Table 2-5: Key differences between the NYSE and the NYSE Arca

Table 2-6: Key differences between the NASDAQ’s GM, GSM and CM

Table 4-1: Mean First-day Returns in Germany from 1997 to 2012

Table 4-2: Other results from former studies on IPO Underpricing in Germany

Table 4-3: Mean First-day Returns in the U.S. from 1997 to 2012

Table 4-4: Other results from former studies on IPO Underpricing in the U.S

List of Figures

Figure 2-1: CFOs who agree or strongly agree in %

Figure 2-2: Global IPO Activity - Annual (1996 - 2012)

Figure 2-3: IPO timeline

Figure 2-4: Capitalizations of 5 largest stock exchanges in Europe and the U.S

Figure 3-1: IPO Underpricing versus Overpricing

Figure 3-2: Asymmetric information between the key parties

Figure 3-3: Post-IPO lockup expire analysis on Facebook and Visa

Figure 4-1: Average first-day returns on European IPOs

Figure 4-2: Number of IPOs and UP-Average First-day Return (1997 – 2012)

Figure 4-3: Average first-day returns on almost non-European IPOs

Figure 4-4: Number of IPOs and Average First-day Return from (1997 - 2012)

List of Appendices

Appendix 1: Global distribution of IPOs in 2011 and 2012

Appendix 2: Notable Upcoming Global IPO

Appendix 3: All Time Largest Global IPOs - Top 25

Appendix 4: Largest stock market capitalizations in Europe and the U.S.

Appendix 5: The 2005 Competitiveness of the Financial Centers

Appendix 6: Country of origin and websites of the analyzed markets

Appendix 7: U.S. monthly IPO volume: January 1960 - December 2012

Appendix 8: Post-IPO price development of Facebook and Visa for 6 months

Appendix 9: Post-IPO lockup expires of Facebook and Visa

Appendix 10: Average UP on the first trading day in European countries

Appendix 11: Average UP on the first trading day on almost non European countries

Appendix 12: Top managing underwriters of 2012

Appendix 13: Top managing underwriters of 2010

1 Introduction

The Initial Public Offering (IPO) which marks one the most important events of a company basically aims to generate maximum proceeds by selling company’s shares to investors.[1] Nevertheless, the shares they sell often seem to be underpriced, insofar that the price significantly soars on the first trading day.[2] Consequently, the company generates fewer proceeds and, hence “leaves money on the table.”[3]

Since the very first detection of this phenomenon in the United States in 1969, several subsequent studies documented the existence of worldwide IPO underpricing nowadays.[4] Considering that underpricing is costly for the company, a question arises why, therefore, despite the fact that the companies “leave money on the table”, they do not try to avoid this by setting the issuing price on the very high?[5]

One of the most striking features of this question is that it had inspired many researchers who tried to explain in various models why IPOs are generally underpriced.[6] Besides, a lot of theoretical explanations concerning this phenomenon have been given by now; however, no common sense has been so far developed.[7]

1.1 Problem Statement

Taking into consideration the problems mentioned before the primary focus of this Master’s Thesis is IPO Underpricing in the European and United States Stock Markets by outlining and discussing three essential issues:

The first issue: What is underpricing in the context of the IPO?

The second issue: Which motivations are there and how do they impact?

The third issue: Is there IPO underpricing in the markets of Europe and

the United States of America?

1.2 Methodological Approach

In order to gain the objectives the Master’s Thesis was structured as follows: Chapter 2 presents a compact overview of the Initial Public Offering (IPO), which includes the main aspects of an IPO, its procedure as well as major listing requirements on selected stock exchanges in Europe and the United States of America. These principals of the IPO are crucial for the understanding of the chapters which follow in this thesis. Hence, chapter 3 discusses the IPO Underpricing and provides main theories of this phenomenon according to asymmetric information, institutional motivations, control considerations and behavioral approaches. In addition, two former IPOs of VISA Inc. and FACEBOOK Inc. have been conducted in order to review some theoretical aspects of underpricing by the own investigation. Chapter 4, however, provides evidence of IPO underpricing in Europe and the United States, combined with empirical results by researchers and the own analysis starting from 1959 till the end of 2012. The own analysis with database over the last 15 years thereby focuses on the markets of Germany and the United States. Finally, Chapter 5 outlines the results and provides an overall conclusion.

2 Initial Public Offerings

It is generally agreed today that an Initial Public Offering is one of the most exciting events in the life of a company which fascinates almost all involved parties around. It allows companies to go public and raise capital by issuing equity for the first time.[8] Mostly this occurs, when the business environment seems appropriate and global markets are stabilized.[9] But one of the most controversial features of this issue is why it is so and what motivates companies and their participants to conduct an Initial Public Offering (IPO)?

This chapter will define an IPO and examine the main issues regarding the motivation, the legal differences and the entire process in both Europe and the United States (U.S.).

2.1 The IPO

It is necessary to mention that there are a lot of definitions of an IPO in the literature; nevertheless, it can be generally defined “as the first public offer of shares of a privately held firm on the primary market and the introduction of these shares to a security market”.[10] Furthermore, it is the first sale of stock by a private company to the public which can be also described as to “go public” or “public flotation”.[11]

Once the going public process has started, often through small and medium-sized enterprises (SMEs), the company transforms from privately held into publicly held firm.[12] Before the primary issue, a company can choose from three offering methodologies which are either considered through the issues of new shares, in order to raise additional cash for the enterprise (“primary placement”), or through the issue of existing shares, owned by the pre-IPO shareholders in order to change the ownership structure (“secondary placement”), or even through a mix of the two strategies.[13] However, it is also necessary to mention, in the context of an IPO, that already listed companies can also raise money by issuing new shares which are called secondary issues.[14]

Unlike to go public through mergers and acquisitions (M&A), in which the company sells itself to an existing listed company and therefore loses corporate control over all further investment issues due to the new owner, an IPO diversifies this exposure by selling shares to retail investors.[15]

2.1.1 Typology and Motivation

The first thing that needs to be said is that the main motivation which drives IPO decisions is often set by smaller, younger companies which seek to expand the capital, however, it can be also conducted by large privately-owned companies which aspire to become publicly traded.[16] This can be clearly seen in the Table 2-1 in which we distinguish the former IPO decisions across the industries.

illustration not visible in this excerpt

Table 2-1: Distribution of IPOs by industry and the incidence of SME-conducted IPOs in European markets from 1995 to 2008[17]

In the technology sector, for instance[18], we usually have young and dynamic companies with high growth during the first years of their life-business cycles, which are able to require substantial capital, but often cannot acquire cash from banks due to their uncertainty and therefore high-risk business models.[19] Considering the data in Table 2-1, it is no wonder that maximum proportion of IPOs during the last two decades reached almost 65% in the technology sector.[20] The great majority of the venture capitalists (VCs) usually preferred to invest in such “start-up” companies in order to participate in their potential future growth, though there was an uncertain exposure on the future development.[21] However assumed, that the business model works, a number of key issues arise for both parties regarding the expanding and “exit” strategies at a certain time. While on the one hand it can be said that it is necessary for the company to raise capital for expansions of operations, it is on the other hand important for the venture capitalist to make money on their investments.[22] Typically, as was discussed above, the best solution for the company and the most profitable exit opportunity for the VC is an IPO.[23]

In the energy, chemical, automotive or even in the financial sector, however, dynamic and high growth rates are less prevalent in comparison to the technology sector.[24] Most companies are established and mostly large are privately held. That is why private equity (PE) funds are engaged to such kind of companies and diversify their portfolios through all the sectors mentioned above.[25] Unlike young and dynamic firms which seek to expand the capital, these companies are looking forward to become publicly traded while PE funds, in the meantime, are interested to gain high returns for their investors through so called “harvest” event.[26] In both cases, this results in an IPO.

Furthermore, another beneficial reason of going public is the fact that the company’s stock can be used as currency through the channel of takeovers to enable cheaper access to the capital and higher liquidity, or just increase prestige, visibility and enhance name recognition.[27] On the other hand, an IPO can also reduce the dependency on money lenders through financing debt reduction, what implies lower financing costs.[28]

Figure 2-1 shows a survey of 336 chief financial officers (CFOs) from the United States which are motivated to go public.[29] As we can recognize from this empirical study, the main reason to go public underlies in the context of transactions and reputation, which can be verified by several other empirical studies as well.[30]

illustration not visible in this excerpt

Figure 2-1: CFOs who agree or strongly agree in %

2.1.2 Disadvantages

Despite all benefits mentioned in the former section of an IPO, the other side of the coin is, however, that companies also have to take risk exposures into account before, during and after the process of going public.[31] First of all, these are the costs in the forefront of the IPO which can be split into direct and indirect costs.[32] Direct costs which are fairly predictable include stock exchange and registration fees, pre-marketing activities, investor relation activities, and legal fees, underwriting fees, consulting and auditing fees.[33] Basically, these direct costs are, for example, between 5-10% in Germany, while in the U.S. a general price of 7% of the gross volume for issues up to $80 million.[34] Indirect costs contain subsequently costs of publicity and management time, where regulations and restrictions are imposed in the IPO market.[35] Another significant but also most complex issue in the context of indirect costs is the underpricing of an IPO which will be described in the third chapter and evidenced in the fourth chapter.[36]

Moreover, reasons against to go public can be local social and corporate culture aspects which may discourage before the process, besides, it is a time-consuming process, and, finally, there is a probability that one of the requirements is dividends which must be paid after the process.[37] So before deciding whether to go public or not, companies must take into consideration several risk factors, weigh up and consider what the advantages and disadvantages of the process are.[38]

2.2 Going Public

When a company decides to go public, further issues regarding the thoroughly preparation arise in order to call successfully attention to the potential investors. Normally, this is a long, intensive and complex process which includes both financial and time expenses.[39] That is why most companies engage advisors who coordinate the entire equity transaction process from preparing for life as a public company, selecting the right capital market and establishing the right team of advisers, advising on regulatory and all other issues.[40]

However, it is not only the question about the right strategy of the entire process but also the “optimal IPO timing” relative to market conditions and other IPOs.[41] Certain unfavorable market conditions can be triggered through the unexpected (e.g. the September 11 attacks in 2001) or financial turmoil (e.g. Asia crisis in 1997; Dot-com Bubble in 1999/00; Subprime crisis in 2007/08; European sovereign debt crisis since 2010), which had a dramatic impact on the companies and had to wait for more favorable market conditions before going public.[42] Nevertheless, unlike in the previous years the markets nowadays distress from an uninterrupted sovereign crisis since 2010, especially in Europe. Hence, most companies which want to go public must face with the uncertainty for an “optimal IPO-timing” due to volatile markets and therefore they need to work out and pursue a well thought-out and flexible strategy in a shorter time frame of the entire process (“prepare early, move fast”).[43]

Figure 2-2 describes the historical development of global IPO activity. Basically, there is to recognize a positive correlation between the market conditions and the IPO activities which can be verified through several empirical analyses as well as aspects of the optimal IPO-timing already mentioned before.[44]

illustration not visible in this excerpt

Figure 2-2: Global IPO Activity - Annual (1996 - 2012)[45]

We can see that the IPO market remained cyclical for a long time; however, general downturn trend of global IPO activities had been strongly affected since 2010 by the unstable economic and political conditions in the Eurozone.[46] Despite that, some IPO markets such as Asian, U.S. and even in the EU performed well under these circumstances.[47] Appendix 1 illustrates that the North American market, mainly the U.S., raised regardless of a low number of IPOs in 2012 with 152 (2011: 108) in comparison to all other markets the highest capital with USD 41,5 billion (2011: USD 36,0 billion). This primarily can be explained through the “Facebook” IPO in May, 2012 with a deal size of USD 16,0 billion and at the same time the largest technology IPO on record.[48] Measured on the number of deals, Europe is leading with 263 IPOs in 2012 (2011: 430 IPOs), followed by the Greater China with 228 IPOs in 2012 (2011: 388 IPOs).

Based on Ernst & Young and PwC studies in 2012, the outlook for IPOs in 2013 is more optimistic, especially within the Eurozone since the market volatility has remained stable and stock market indices continued to recover in the second half of 2012.[49] In the following sections, the general milestones of going public will be described which include the entire phases of preparation, legal and regulatory, valuation, marketing, pricing, underwriting and listing.

2.2.1 The IPO Process

„Some rules of thumb for a firm considering an IPO are that the company is growing, that it has a definite need for much larger funding, that it has a “good story”, and that it is a good time in the market for this type of company.”[50] GHOSH pointed out, therefore, that the company needs also to meet market requirements in addition to regulatory requirements and an optimal timing in order to fulfill the IPO with a “good equity story”.[51]

That is why the process of an IPO starts long before the first day of trading.[52] From the decision to go public until the initial listing, issuers must undergo a number of procedures which are time-consuming and typically take from 12 up to 16 weeks from the start till the end of the process.[53] Overall, the IPO can generally be completed within 15 till 20 weeks.[54] However, the exact time depends on actual market conditions, complexity of the transaction and several other factors.[55]

Hence, considering the entire process, the issuer must hire appropriate partners (underwriter, auditor, legal counsel), and make a careful assessment whether the requirements for going public are met regarding diligence, elaborating the issuing concept and the equity story as well as setting up an efficient corporate organization.[56]

Figure 2-3 presents a detailed timeline of events which are generated through a combination of different IPO guidelines but can be generally applied to overall IPO processes.

illustration not visible in this excerpt

Figure 2-3: IPO timeline[57] Phase I: Preparation of the IPO

At the very beginning, assuming the private company itself successfully accomplished all issues regarding the readiness to go public, it is the first step to select an appropriate underwriter.[58] This is normally a syndicate of investment banks in which one bank takes the leadership and is in charge of the entire process.[59] The lead underwriter plays an essential intermediary role in the offering process.[60] While he coordinates all involved parties in the process, amongst other things between the advisors, the issuer, the stock exchange, selling stockholders and potential investors, he also involves own internal bank divisions such as the Equity Capital Markets, Research and Sales and Trading in order to guarantee offering success.[61] As already mentioned, however, other professional advisors (e.g. auditors, lawyers and consultants) selected by the issuer due to legal and regulatory requirements, play also an important role in the pre-IPO planning process.[62]

After all, the company then refines its strategy for the IPO in conjunction with its advisors and syndicate bank to develop an adequate “prospectus” (also known as “equity story”), a legal document that basically serves as a brochure for the company.[63] Phase II: Structuring & Valuation

The second phase evaluates and prepares the company for the upcoming flotation process by conducting a due diligence and a company’s prospectus.[64] Besides, considerations on the admission for listing will be discussed.[65]

“The purpose of due diligence is to ensure the accuracy, completeness and truthfulness of the company’s registration statement,” in order to provide the interested party the concrete evidence.[66] While the due diligence is an important internal approach for all advisors, especially for the lead underwriter (also known as the “sponsor”), to fully understand the company and to confirm readiness for the IPO, the prospectus which is derived from the due diligence report is an extended but official version and must be filed with the nations securities and exchange commission’s (e.g. in the U.S.: SEC, UK: UKLA, Germany: BaFin).[67] Nevertheless, it is ultimately the responsibility of the lead underwriter (and the lawyers) to ensure that all material facts are analyzed, reviewed and disclosed in the prospectus through the due diligence.[68]

One of the major challenging steps throughout this phase marks the first valuation of the company which is the basis for the final offer price and needed to be set in the fourth phase.[69] A firm conducting a flotation process needs to have its stock valued before the IPO, in order to determine an appropriate price range which will be finalized with the best possible price after the roadshow.[70] However, since there will be no public market value for the business to inform them “right price”, their challenge is to establish what public market value should be.”[71] This is a crucial part of the valuation due to various factors such as market conditions, characteristics of the firm, stock exchange or even valuation method aspects, which impact the valuation of a company and eventual pricing in the stock.[72]

Basically, there are numerous methods for stock valuation in which we focus on the major valuation methods, widely used valuation approaches in the IPO process.[73] That is, on the one hand, the discounted free cash flow (DCF) method and, on the other hand, valuation approaches that rely on multiples of already listed comparable companies or comparable companies involved in similar transactions.[74] While the DCF method is static, complex and time-consuming approach, the multiple method is able to deal with IPO firm characteristics, aggregate stock market return and stock market volatility and, hence, it is very helpful.[75] That is why most of lead underwriters nowadays use the multiple method approach as the major valuation method instead of DCF in the IPO process.[76]

The most frequently used multiple in the comparable approach is the price-earning (P/E) ratio, which consists in value measure, the share price P, an accounting measure, the earnings per share E.[77] Either through the comparable company method or through the historical comparable transactions method with premium discount, both based on peers, the aggregated multiple of single numbers by using the arithmetic mean can be applied to an approximate earnings per share of the target company in order to compute a price per share.[78]

The estimated price per share, however, is only approximate and does not reflect the market expectation.[79] It is the first visible value which will be discussed and further negotiated and in most cases significantly downgraded until the first day offer.[80] Phase III: Marketing & Roadshow

After the company’s value has been estimated, the marketing process comes next and consists in number of distinct stages which take place in the following order:[81]

- Preparing the media
- Research analysts briefing
- Pre-Marketing to key investors
- Marketing to investors through roadshows

Preparing the media

Typically, some months before the IPO is expected to go public, articles about the company, its business and its management are published in the media.[82] Studies found out that the media influences the market performance of firms vice versa the management increases performance for a good publicity of the company to be used in the marketing efforts.[83]

Research analysts briefing

Outside the IPO process and approximately 2-3 weeks prior to the pre-marketing, the investment banks arrange meetings at which the company presents detailed financial and strategic information to syndicate research analysts and enable them to prepare detailed research.[84] This is an important procedure in the line of the IPO process, because hereby the analysts reflect fairly the company’s prospects which will be additionally informing investor’s opinion.[85] However, the research must be independent which implies the provision of unbiased reports of the company to be completed by the time the company issues its “Announcement of Intention to Float”.[86]

Pre-Marketing to key investors

The announcement of intention to float is the official beginning of the public marketing.[87] It is usually a number of meetings to be held with the media and visiting for a number of key investors to “warm them up” and get their feedback which is also known as the “Investor Education” phase.[88] This is essential for the success of the roadshow presentation because it is used to refine company’s thinking on critical aspects and about the valuation, to be used to set a price range for the shares which will be offered in the IPO.[89]

Marketing to investors through roadshows

The last step in the marketing process is the roadshow, generally 2 weeks prior to the IPO.[90] Though the investment bank (“lead underwriter”) will spearhead the process, it is the time where the company’s management will present professionally itself to institutional investors, typically they do attend each location for a half hour, and answer questions.[91] All meetings are fundamental for the entire process as the management is selling the IPO story to investors.[92] The company conducts a series of one-on-one and group meetings or telephone conference calls with investors that will potentially purchase the shares being offered.[93] Due to the demand and price offering of investors to company shares, this last step in the chain of marketing is amongst other things, highly relevant for the last phase of the IPO process, the final pricing and trading. Phase IV: Pricing & Trading

In the last phase of the IPO process, the company in conjunction with the syndicate, especially the lead underwriter, combines all information they received in order to set up an appropriate offering price.[94] But how they do and whether valuation and the company’s future operation excellence have an impact on pricing or is it just a marketing decision, remain the most frequent issues in the literature.[95]

On the one hand, there are three pricing options which are bookbuilding, tender (also known as auction) and fixed price to set an offering price.[96] On the other hand, it is the “grey market” which reflects the opinion of retail investors and takes place simultaneously to the bookbuilding.[97] The three IPO mechanisms in conjunction with the “grey market” opinion allow the lead underwriter to review the estimated price per share with capital market before the IPO.[98] At the end, using information between the issuer and the investors, the underwriter sets an appropriate offering price.[99] However, this is particular the moment where this advantage knowledge might be used for own interest of the underwriter.[100] Despite the fact, the operation mechanisms principles of all mentioned factors shall be shortly described in the following.


The Bookbuilding is the exercise by which institutional demand for an issue is estimated in advance of fixing the price for an issue which usually takes place alongside the roadshow.[101] This bookbuilding process helps to review the estimated price per share by a daily communication and submission of new orders as well as confirmation to financial advisors from stockbrokers of cumulative orders and pricing.[102] The final offer price, however, will be then set with the number of shares to be issued in correspondence with the “bookrunner” (“lead underwriter”), the company and certain existing shareholders, one day before the IPO starts.[103] This is why the bookbuilding mechanism is mostly used in the practice due to its fairness and control for all parties.[104]


[1] Cf. Ljungqvist, A. (2004), p. 1; Hopp and Dreher (2007), p.2.

[2] Cf. Arugaslan, O. et al. (2004), p. 2403; Booth and Booth (2010), p. 2.

[3] Cf. Loughran and Ritter (2004), pp. 5-6; Booth, L. (2006), pp. 1-2; Ljungqvist, A. (2006), p. 62.

[4] Cf. Sahoo and Rajib (2007), pp. 39-40; Loughran, T. et al. (2013), pp. 165-167.

[5] Cf. Ljungqvist, A. (2004), p. 1; Sahoo and Rajib (2007), p. 40; Loughran, T. et al. (2013), p. 164.

[6] Cf. Ljungqvist, A. (2004), p. 2; Boulton, T. et al. (2011), p. 484.

[7] Cf. Elston and Yang (2010), p. 518; Brealey, R. et al. (2011), pp. 372-373.

[8] Cf. Paleari, S. et al. (2012), p. 5; Deloitte (2012), p. 2; PwC (2010), pp. 5-6.

[9] Cf. Ragupathy, M. (2011), p. 41; PwC (2012), p. 3.

[10] Cf. Carls, A. (2007), p. 415; Drobetz, W. (2008), p. 21.

[11] Cf. Dimovski, B. (2006), pp. 25-26; Downes and Goodman (2010), p. 349.

[12] Cf. Paleari, S. et al. (2009), p. 9; PwC (2010), p. 8.

[13] Cf. Draho, J. (2004), p. 2-3; Paleari, S. et al. (2009), p. 99.

[14] Cf. Muscareiia and Vetsuypens (1989), p.1.

[15] Cf. Ragupathy, M. (2011), p. 41; Paleari, S. et al. (2012), p. 5; Hsieh, J. et al. (2011), p. 1367.

[16] Cf. Dimovski, B. (2006), pp. 25-26; Paleari, S. et al. (2009), p. 7.

[17] I llustration following Paleari, S. et al. (2009), p. 12.

[18] This sector contains businesses revolving around the manufacturing of electronics, creation of software, computers or products and services relating to information technology, such as Internet-based and Bio-Tech-based companies. Cf. Investopedia (, 2012).

[19] Cf. Xiong and Bharadwaj (2011), p. 88; Harmon, S. (2001), pp. 2-3.

[20] Based on the data in Table 2-1, IPO initial reached astronomical levels during 1999-2000.

[21] Cf. Gompers, P. (2006), p. 2; Rossetto, S. (2006), pp. 30-31.

[22] Cf. Draho, J. (2004), p. 1; Gompers, P. (2006), p. 24; Rossetto, S. (2006), p. 31.

[23] Cf. Gompers, P. (2006), p. 34; Rossetto, S. (2006), p. 31-32.

[24] Academic studies have scientifically proven that the dotcom bubble at the global markets in 2000 and 2001 where caused by IPOs of technology-related firms. A dotcom bubble however is defined as a “rapid inflation in the valuation of public and private technology companies that exceeds their fundamental value by a large margin.” Cf. Cendrowski, H. et al. (2008), pp. 86-90; The Economist (, 2011).

[25] Cf. Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (, 2009).

[26] A “harvest” is an event whereby the investor and the management of a company sell at least a portion of their shares to the public or corporate buyers. Cf. Cendrowski, H. et al. (2008), p. 83.

[27] Cf. Paleari, S. et al. (2012), p. 6; Drobetz, W. (2008), p. 21; Rossetto, S. (2006), pp. 38-39; Hsieh, J. et al. (2011), p. 1368.

[28] Cf. NYSE Euronext (, 2012); Birkenbeul, C. (2012), p. 4.

[29] Cf. Brau and Fawcett (2006), pp. 399-404; Brealey, R. et al. (2011), p. 367.

[30] Cf. Ragupathy, M. (2011), p. 42; Birkenbeul, C. (2012), p. 5.

[31] This also includes the potential failure of an entire IPO process. Failures occur for instance through: inappropriate valuation (e.g. Evonik Industries AG in 2012), system errors at the stock exchange (e.g. Bats Global Markets Inc. in 2012) or inappropriate market conditions (e.g. DB Mobility Logistics in 2008). Cf. Demers and Joss (2007), pp. 333-337; Ritter and Welch (2002), p. 6; Bloomberg (, 2012); Reuters (2012), p. 3; Chemical Week (2012), p. 6.

[32] Cf. Drobetz, W. (2008), p. 28; PwC (2010), pp. 9-11.

[33] Cf. Draho, J. (2004), pp. 5-8; Drobetz, W. (2008), pp. 28-29.

[34] Cf. Paleari, S. et al. (2009), pp. 46-67; Birkenbeul, C. (2012), p. 5.

[35] Cf. Drobetz, W. (2008), p. 29; PwC (2010), p. 10.

[36] Cf. Ghosh, C. et al. (2012), p. 2; Ritter, J. (, 2013).

[37] Cf. Sullivan, B. (1965), pp. 49-50; Draho, J. (2004), p. 182.

[38] Cf. Demers and Joss (2007), pp. 333-337; Birkenbeul, C. (2012), p. 5.

[39] Cf. Ritter and Welch (2002), pp. 6-8; Cao, J. (2011), p. 1001.

[40] Cf. PwC Hong Kong (, 2012); Cendrowski, H. et al. (2008), p. 373.

[41] Appendix 7 illustrates a database of monthly frequency of IPO volumes in the U.S. since 1960. There is to recognize that most of IPOs generally proceed from spring to summer in a year. Cf. Draho, J. (2004), p. 10; Cao, J. (2011), p. 1002; Ritter, J. (, 2013).

[42] Figure 2-2 visualizes all downturns mentioned in the context of optimal IPO-timing. Cf. Elschen and Lieven (2009), p. 18; Ljungqvist and Wilhelm (2003), pp. 724-725; Bernd, F. (2012), p. 2; Payne, B. (2011), pp. 150-151; Barrell and Dury (1998), p. 57.

[43] Cf. Bernd, F. (2012), p. 2; PwC (2012), p. 5; Paleari, S. et al. (2012), p. 65; E&Y (2012), p. 2.

[44] Cf. PwC (2012), pp. 2-4; Draho, J. (2004), pp. 10-13; Cendrowski, H. et al. (2008), pp. 96-99.

[45] Illustration based on data of Bloomberg (, 2013); WFE (, 2013); Renaissance Capital (, 2012).

[46] Cf. E&Y (2012), pp. 2-3; PwC (2012), pp. 2-4.

[47] Appendix 4 shows a deeper analysis of global distribution data of IPOs in 2011 and 2012.

[48] Appendix 3 illustrate a compact view of “All time largest global IPOs, Top 25”, based on the Renaissancecapital data as of Dec. 31, 2012 and Bloomberg (, 2012).

[49] Appendix 2 illustrates upcoming global IPOs in 2013, where the German market expects two large fund raisings. Cf. E&Y (2012), pp. 3-12; PwC (2012), pp. 2-5.

[50] Cf. Ghosh, A. (2006), p. 21.

[51] Market requirements can be classified into quantitative criteria and qualitative criteria which include: a proven product range or service range in a strong market; satisfactory record of profits growth; reasonable prospects for future profits and growth; sound management; that the timing of the flotation is appropriate. Cf. Draho, J. (2004), pp. 182-183; Petersen, M. (2001), pp. 57-58; Cendrowski, H. et al. (2008), p. 88; Downes and Goodman (2010), pp. 576-577.

[52] Cf. Draho, J. (2004), p. 212; Deutsche Börse Group (2010), p. 2.

[53] Cf. Draho, J. (2004), p. 182; Deutsche Börse Group (2010), pp. 2-3.

[54] Cf. London SE (2010), p. 26; NYSE Euronext (2010), pp. 35-36.

[55] Cf. NYSE Euronext (2010), p. 36; Cendrowski, H. et al. (2008), pp. 87-88.

[56] Cf. Draho, J. (2004), p. 212; Deutsche Börse Group (2010), p. 2.

[57] Own illustration following Draho, J. (2004), p. 183; London SE (2010); pp. 23-25; Deutsche Börse Group (2010), pp. 1-5; NYSE Euronext (2010), pp. 34-43; SEC (, 2012).

[58] Cf. Cendrowski, H. et al. (2008), p. 87; Drobetz, W. (2008), p. 25; Corwin and Schultz (2005), p. 445; NYSE Euronext (2010), p. 36; Deutsche Börse Group (2010), p. 3.

[59] “In most cases, lead underwriters are “bookrunners.” Lead underwriters/bookrunners take on most of the responsibilities of the managing underwriters, which might include due diligence, marketing of the issue, pricing, price stabilization, market making, and analyst research coverage of the stock.” Cf. Hu and Ritter (2007), p.3; Corwin and Schultz (2005), p. 446; Schenone, C. (2004), p. 2903; Downes and Goodman (2010), p. 795; Cendrowski, H. et al. (2008), p. 88.

[60] Figure 3-2 illustrates the intermediary role of the underwriter in the IPO process. Cf. Ragupathy, M. (2011), p. 43; Draho, J. (2004), p. 212.

[61] Cf. Corwin and Schultz (2005), p. 447; Gygax and Stephanie (2011), pp. 124-125.

[62] Cf. Cendrowski, H. et al. (2008), p. 87; Draho, J. (2004), p. 212; NYSE Euronext (2010), p. 34.

[63] Several strategic issues on the determination of the transaction structure and the motivation behind the IPO in order to fulfill a “good equity story.” Cf. Ghosh, A. (2006), p. 22; Deutsche Börse Group (2010), p. 3; Downes and Goodman (2010), p. 565.

[64] Cf. Downes and Goodman (2010), p. 204; NYSE Euronext (2010), p. 36.

[65] Section 2.3 describes detailed the listing requirements. Cf. Deutsche Börse Group (2010), p. 4.

[66] Cf. NYSE Euronext (2010), p. 36; Dunlap, N. (2011), p. 46; London SE (2010), p. 27.

[67] The prospectus must contain all financial information and a description of a company’s business history, officers, operations, pending legation (if any), and plans (including the use of the proceeds of the issue), risks, necessary for investors to determine if they will subscribe to the listing. Moreover, it satisfies the requirements of the related rules for listing, disclosure and prospectus directive. In other words, it is a formal written offer for the sale of company’s shares approved by the nations Securities and Exchange Commission’s and published with the roadshow. Cf. Downes and Goodman (2010), p. 565; NYSE Euronext (2010), p. 36; London SE (2010), p. 27; “Facebook” Prospectus published by the SEC (, 2012); Deutsche Börse Group (2010), p. 4; Cendrowski, H. et al. (2008), p. 91; Deloitte (2012), p. 42; PwC (2010), pp. 20-21.

[68] Cf. PwC (2010), p. 50; Dunlap, N. (2011), p. 46; Deloitte (2012), p. 32.

[69] Section describes how the final offer price results. Cf. Neill, J. et al. (1995), p. 68; Draho, J. (2004), p. 158; Cendrowski, H. et al. (2008), p. 88; Deloitte (2012), pp. 35-36.

[70] Cf. Deloof, M. et al. (2009), p. 130; Neill, J. et al. (1995), pp. 68-69; NYSE Euronext (2010), p. 63.

[71] Cf. London SE (2010), p. 63; Deloitte (2012), p. 36; Lerner, J. et al. (2008), p. 400.

[72] Since the New Economy, most of academic studies as well as in the market itself pointed especially for technology/internet firms out that “traditional” valuation do not work e.g. due to short track record or a fast growth business for which no benchmark exist. Cf. Seppelfricke, P. (2012), p. 144; PwC (2010), p. 8; Draho, J. (2004), p. 158; Deloitte (2012), p. 72; Aggarwal, R. et al. (2009), pp. 253-254; Guo, R. J. et al. (2005), p. 424; Ragupathy, M. (2011), p. 44; Bartov, E. et al. (2002), p. 324.

[73] Cf. Seppelfricke, P. (2012), p. 144; Deloitte (2012), p. 36; London SE (2010), p. 63.

[74] Cf. Deloof, M. et al. (2009), p. 130; Draho, J. (2004), pp. 159-160.

[75] Cf. Deloof, M. et al. (2009), pp. 130-131; Schreiner, A. (2007), p. 48.

[76] Cf. Bartov, E., et al. (2002), pp. 323-324; Deloof, M. et al. (2009), p. 131; Seppelfricke, P. (2012), p. 144; Aggarwal, R. et al. (2009), p. 253; Draho, J. (2004), p. 160; Sahoo and Rajib (2007), p. 60.

[77] Cf. Schreiner, A. (2007), p. 49; Draho, J. (2004), p. 161; Deloof, M. et al. (2009), p. 131.

[78] The “peers”, also known as the “peer group”, represents a basket of firms or corporate transactions, whose profile of expected future free cash flow and other characteristics are comparable to the target firm’s profile. Cf. Schreiner, A. (2007), pp. 50-51; Draho, J. (2004), p. 161.

[79] Note: „Traditional valuations“ do not work, when there exist no benchmark, e.g. Facebook IPO. Cf. Koller, T. et al. (2005), p. 371; Cusumano, M. A. (2012), p. 20; Bartov, E. et al. (2002), p. 322.

[80] Cf. Draho, J. (2004), p. 161, Schreiner, A. (2007), p. 51; Ragupathy, M. (2011), p. 45.

[81] Cf. London SE (2010), p. 61; Deloitte (2012), p. 54; NYSE Euronext (2010), p. 37.

[82] Cf. Deloitte (2012), p. 8; London SE (2010), p. 61.

[83] Cf. Ojala, M. (2012), pp. 52-53; Pollock, T. et al. (2008), pp. 337-338.

[84] Detailed analysis on operations, financial data and on the company’s outlook and strategy. Cf. London SE (2010), p. 61; Deloitte (2012), p. 54; NYSE Euronext (2010), p. 37.

[85] Cf. London SE (2010), p. 61; Jaisfeld, M. (2012); pp. 1-8; Deloitte (2012), p. 55.

[86] Cf. SEC of Sri Lanka (2012), p. 4; London SE (2010), p. 62.

[87] Cf. London SE (2010), p. 62; Deloitte (2012), pp. 55-56.

[88] Cf. PwC (2010), p. 23; NYSE Euronext (2010), pp. 37-38; London SE (2010), p. 62.

[89] Cf. London SE (2010), p. 62; Deloitte (2012), pp. 55-56; PwC (2010), p. 23.

[90] The definition of the „Roadshow“ is regarding to Downes and Goodman, a presentation by an issuer of securities to potential buyers about the merits of the issue. Management of the company issuing stocks or bonds doing a road show travels around the country presenting financial information and an outlook for the company and answering the questions of analysts, fund managers, and other potential investors which is also known as a “dog and pony show”. Cf. Downes and Goodman (2010), p. 620; London SE (2010), pp. 63-64; Deloitte (2012), p. 56.

[91] It is also the time where all reports on and of the company will be published those are the final prospectus and the analyst reports. Cf. Deloitte (2012), p. 56; London SE (2010), p. 63; Lerner, J. et al. (2008), p. 385; NYSE Euronext (2010), pp. 44-46; Draho, J. (2004), pp. 188-190.

[92] Cf. London SE (2010), p. 64; NYSE Euronext (2010), p. 44.

[93] Cf. NYSE Euronext (2010), p. 44; PwC (2010), p. 56; Lerner, J., et al. (2008), pp. 385-386.

[94] Cf. Deutsche Börse Group (2010), p. 6; Deloof, M. et al. (2009), p. 132.

[95] Cf. Ragupathy, M. (2011), p. 44; Corwin and Schultz (2005), p. 444.

[96] Cf. Draho, J. (2004), p. 215; Lerner, J. et al. (2008), p. 387.

[97] Cf. Schnigge Wertpapierhandelsbank AG (, 2012).

[98] Cf. Biais, B. et al. (2002), p.118; Draho, J. (2004), p. 216; Cornelli, F. et al. (2004), p. 1; Schnigge Wertpapierhandelsbank AG (, 2012).

[99] Cf. Cendrowski, H. et al. (2008), p. 89; Ragupathy, M. (2011), p. 44.

[100] This phenomenon will be detailed examined in section 3.2.1 (“Asymmetric information”). Cf. Ragupathy, M. (2011), p. 44; Chemmanur and Krishnan (2012), p. 770; Drobetz, W. (2008), p. 29.

[101] Cf. Draho, J. (2004), p. 216; PwC (2010), p. 57; Deutsche Börse Group (2010), p. 6.

[102] However, the interests are not obligated so that they can be rescinded without a penalty. Cf. Draho, J. (2004), p. 216; London SE (2010), p. 64; NYSE Euronext (2010), p. 44.

[103] Hu and Ritter pointed in a study on multiple bookrunners out that so long there exist only one book runner in the process, so more the likelihood is that the range and the offer price tends to be lower vice versa when there are multiple bookrunners the range as well as the price tends to be higher. Cf. Hu and Ritter (2007). p. 4; Draho, J. (2004), p. 216; London SE (2010), p. 64.

[104] Based on a study of Ljungqvist between 1997 and 2010, 80% of all IPOs outside North America and 94% in Germany use bookbuilding accounts. Cf. Ljungqvist, A. et al. (2003), p. 72.

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The Phenomenon of IPO Underpricing in the European and U.S. Stock Markets
University of Duisburg-Essen
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Oliver Reiche (Author), 2013, The Phenomenon of IPO Underpricing in the European and U.S. Stock Markets, Munich, GRIN Verlag,


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