| By: |
Ales Cornanic (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic);
Jiri Novak (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: |
The signaling hypothesis suggests that firms have incentives to underprice
their initial public offerings (IPOs) to signal their quality to the outside
investors and to issue seasoned equity (SEO) at more favorable terms. While
the initial empirical evidence on the signaling hypothesis was weak, Francis
et al. (2010) show that foreign firms from segmented (rather than integrated)
markets strategically underprice their IPO in U.S. markets to distinguish
themselves from the weaker players. Hence, the attractiveness of the signaling
strategy seems to be related to the a priori level of information asymmetry.
We examine the use of signaling in an emerging market where the information
asymmetry is likely to be higher relative to an established market. Using a
sample of 158 Polish IPOs from 2005 – 2009, we show that firms that underprice
their IPOs are more likely (i) to issue seasoned equity, (ii) to issue a
larger portion of equity at the SEO, and (iii) to make the SEO sooner after
the IPO, all of which are consistent with the signaling hypothesis. This
evidence suggests that the results of Francis et al. (2010) are not limited to
IPOs made by foreign firms in an established market, but they can be extended
to primary listings by domestic firms in markets where the information
asymmetry is sufficiently large for the benefit of the signal to outweigh its
cost. |
| Keywords: |
initial public offering, seasoned equity offering, underpricing, signaling, emerging market, Poland |
| JEL: |
G14 G15 G30 |
| Date: |
2013–07 |
| URL: |
http://d.repec.org/n?u=RePEc:fau:wpaper:wp2013_07&r=cfn |