MARKET SENTIMENT. MEDIA HYPE AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS: THE CASE OF AUSTRALIAN TECHNOLOGY IPOS BEAUTY HO, MAYA TAHER, ROBERT LEE AND NEIL FARGHER SCHOOL OF ACCOUNTING THE UNIVERSITY OF NEW SOUTH WALES AUGUST 10. 2001 Acknowledgements The authors thank participants in the Current Developments in Financial Accounting Research Seminar at the University of New South Wales, Elizabeth Carson, and Mike Wilkins for their helpful comments. We gratefully acknowledge the provision of data and assistance from William Huang of the Securities Industry Research Centre of the Asia-Pacific ("SIRCA"), and Atika Lenz from JPMorgan. We also acknowledge the research assistance of Wendy Chan. Any errors or omissions remain the responsibility of the authors alone All data is publicly available
MARKET SENTIMENT, MEDIA HYPE AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS: THE CASE OF AUSTRALIAN TECHNOLOGY IPOS. BEAUTY HO, MAYA TAHER, ROBERT LEE AND NEIL FARGHER SCHOOL OF ACCOUNTING THE UNIVERSITY OF NEW SOUTH WALES AUGUST 10, 2001 Acknowledgements The authors thank participants in the Current Developments in Financial Accounting Research Seminar at the University of New South Wales, Elizabeth Carson, and Mike Wilkins for their helpful comments. We gratefully acknowledge the provision of data and assistance from William Huang of the Securities Industry Research Centre of the Asia-Pacific (“SIRCA”), and Atika Lenz from JPMorgan. We also acknowledge the research assistance of Wendy Chan. Any errors or omissions remain the responsibility of the authors alone. All data is publicly available
MARKET SENTIMENT. MEDIA HYPE AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS THE CASE OF AUSTRALIAN TECHNOLOGY IPOS Abstract This study examines the relationship between the extent of initial public offering (IPO) underpricing and market sentiment surrounding technology issues listing on the Australian Stock Exchange(AsX) during 1999 and 2000. We consider hype surrounding these issues as reflected in the media and as reflected in the market 's sentiment towards recent offerings by similar firms We also consider the relationship between technology firms' need for follow-on offerings due to cash burn' and the level of underpricing. Finally, we examine the information content of management and accountant going concern warnings as a signalling mechanism to reduce ex ante uncertainty regarding the relative risk of IPO candidates Our preliminary results indicate that the extent of underpricing is systematically related to variables measuring the market sentiment surrounding the listing of an IPO. Specifically, underpricing is higher following high underpricing in similar recent issues. There is some evidence of higher underpricing for firms with higher media interest and in the period of the hot IPO market prior to april 2000. We find that firms that experience a greater rate of cash burn also experience greater underpricing consistent with the conjecture that such firms are more likely to need additional financing shortly after they go public. The association between cash burn and underpricing is however reliant on inclusion of a few issues with very high underpricing. We also find evidence consistent with warnings in the prospectus regarding going concern issues providing a valuable signal to mitigate investors' ex ante uncertainty about the value of an offering, thereby reducing the subsequent level of underpricing achieved by that firm
1 MARKET SENTIMENT, MEDIA HYPE AND THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS: THE CASE OF AUSTRALIAN TECHNOLOGY IPOS. Abstract This study examines the relationship between the extent of initial public offering (IPO) underpricing and market sentiment surrounding technology issues listing on the Australian Stock Exchange (ASX) during 1999 and 2000. We consider ‘hype’ surrounding these issues as reflected in the media and as reflected in the market’s sentiment towards recent offerings by similar firms. We also consider the relationship between technology firms’ need for follow-on offerings due to ‘cash burn’ and the level of underpricing. Finally, we examine the information content of management and accountant going concern warnings as a signalling mechanism to reduce ex ante uncertainty regarding the relative risk of IPO candidates. Our preliminary results indicate that the extent of underpricing is systematically related to variables measuring the market sentiment surrounding the listing of an IPO. Specifically, underpricing is higher following high underpricing in similar recent issues. There is some evidence of higher underpricing for firms with higher media interest and in the period of the hot IPO market prior to April 2000. We find that firms that experience a greater rate of cash burn also experience greater underpricing consistent with the conjecture that such firms are more likely to need additional financing shortly after they go public. The association between cash burn and underpricing is however reliant on inclusion of a few issues with very high underpricing. We also find evidence consistent with warnings in the prospectus regarding going concern issues providing a valuable signal to mitigate investors’ ex ante uncertainty about the value of an offering, thereby reducing the subsequent level of underpricing achieved by that firm
1. INTRODUCTION We examine the economic factors determining the level of underpricing in recent initial public offerings(IPOs") by Australian technology firms during 1999 and 2000. The paper contributes to the existing literature by extending the findings of DuCharme et al. (2001)that link and a firm's need for follow-on financing. Secondly, we examine the information content or o unprecedented levels of underpricing achieved by technology firms with measures of stock hy management and accountant warnings regarding going concern issues as a signalling mechanism to mitigate ex ante uncertainty for IPO candidates(Willenborg and McKeown 2000)during a period where regulatory changes facilitated the listing of companies with high levels of inherent The volatile market conditions experienced by so called"new economy'firms in recent years have, on average, culminated in very high levels of underpricing of IPOs. KPMG reports in their 1999 capital markets survey that Australian technology stocks achieved an average level of first day underpricing of 57 per cent to issue prices. Underpricing varied within the converging business sector from a positive return of 236 per cent for Liberty One to a decline of 45 per cent for Spike Networks. Whether the high levels of valuation for technology stock offerings regarded as rationally reflecting very high growth options, or is an example of a ' hot issue market'(e.g. Ritter 1984)that reflects hypaethral(excessive, open to the sky ) expectations for future growth for these firms, the period examined provides a suitable period in which to examine the association between market sentiment and IPO underpricing. In such markets a 'hype develops surrounding the market for new issues. We view hype as a measure of the excitement surrounding a pending issue. We use the term hype' to includ excitement generated by: (1) the print and electronic media in relation to an IPO candidates listing, and(2) the hype derived from the equity markets sentiment towards public offerings by technology firms as reflected in recent offerings. DuCharme et al(2001) find that the extent of underpricing is systematically related to greater levels of news exposure for the IPO candidate in a seven-day period prior to the IPO fo sample of US-based internet companies. This paper examines the degree to which DuCharme et al's(2001)results for a narrow set of internet stocks may be generalised for a broader sample of Australian firms operating in the so called convergent business sector.Further, we expand the notion of hype as it was operationalised by DuCharme et al. (2001)to include both hype While we measure several sources of hype' we readily acknowledge that all the characteristics of hype'are clustered in a hot IPO market and can not be regarded as independent factors
2 1. INTRODUCTION We examine the economic factors determining the level of underpricing in recent initial public offerings (“IPOs”) by Australian technology firms during 1999 and 2000. The paper contributes to the existing literature by extending the findings of DuCharme et al. (2001) that link unprecedented levels of underpricing achieved by technology firms with measures of stock hype and a firm’s need for follow-on financing. Secondly, we examine the information content of management and accountant warnings regarding going concern issues as a signalling mechanism to mitigate ex ante uncertainty for IPO candidates (Willenborg and McKeown 2000) during a period where regulatory changes facilitated the listing of companies with high levels of inherent risk. The volatile market conditions experienced by so called ‘new economy’ firms in recent years have, on average, culminated in very high levels of underpricing of IPOs. KPMG reports in their 1999 capital markets survey that Australian technology stocks achieved an average level of first day underpricing of 57 per cent to issue prices. Underpricing varied within the converging business sector from a positive return of 236 per cent for LibertyOne to a decline of 45 per cent for Spike Networks. Whether the high levels of valuation for technology stock offerings is regarded as rationally reflecting very high growth options, or is an example of a ‘hot issue market’ (e.g. Ritter 1984) that reflects hypaethral (excessive, open to the sky) expectations for future growth for these firms, the period examined provides a suitable period in which to examine the association between market sentiment and IPO underpricing. In such markets a ‘hype’ develops surrounding the market for new issues. We view ‘hype’ as a measure of the excitement surrounding a pending issue. We use the term ‘hype’ to include excitement generated by: (1) the print and electronic media in relation to an IPO candidate’s listing, and (2) the hype derived from the equity market’s sentiment towards public offerings by technology firms as reflected in recent offerings.1 DuCharme et al.(2001) find that the extent of underpricing is systematically related to greater levels of news exposure for the IPO candidate in a seven-day period prior to the IPO for a sample of US-based internet companies. This paper examines the degree to which DuCharme et al.’s (2001) results for a narrow set of internet stocks may be generalised for a broader sample of Australian firms operating in the so called ‘convergent business sector’.2 Further, we expand the notion of hype as it was operationalised by DuCharme et al. (2001) to include both hype 1 While we measure several sources of ‘hype’ we readily acknowledge that all the characteristics of ‘hype’ are clustered in a ‘hot IPO’ market and can not be regarded as independent factors
generated by the print and electronic media, and hype derived from the equity markets sentiment towards public offerings by technology firms Previous research by Willenborg and McKeown(2000)suggests the role of going-concern opinions in reducing information asymmetry, and therefore ex ante uncertainty, for IPO candidates. We extend this research on the information content of audit qualifications issued pre IPO to an Australian setting where recent amendments to the asX Listing rules have tempered e emphasis on profitability as a prerequisite to raising public equity. We also introduce a broader measure of going concern warnings' beyond an audit qualification designed to incorporate circumstances where investigating accountants may formally approve an entitys accounts while implicitly questioning the ability of that firm to operate as a going-concern We examine initial public offerings by technology companies on the AsX during 1999 and 2000. This two-year period includes a period of high growth expectations for technology stocks and a period of diminished expectations following the dramatic reduction in technology share prices that occurred in April 2000. By restricting our analysis to technology industry IPOs we examine variation within a relatively homogeneous sample of firms, but we expect cross- sectional variation in underpricing and market hype surrounding these issues across the period examined Our preliminary results indicate that the extent of underpricing is systematically related to variables measuring the hype surrounding the listing of an IPO candidate on the AsX. We find that the market sentiment as reflected in the underpricing of recent, comparable IPO candidates is systematically related to the underpricing performance of the current technology offerings Excluding a few IPOs from the sample, based upon statistical criteria, there is greater underpricing of technology IPO candidates prior to the technology market correction in April 2000. Stock hype as measured by the print and electronic media coverage of IPO candidates in the period preceding their listing on the asX is only marginally significant in explaining subsequent underpricing achieved upon listing for the full sample. The media coverage is associated with underpricing when extreme observations are excluded based upon statistical criteri There is evidence that some Australian technology firms that experienced high underpricing also had a greater rate of cash burn, consistent with the conjecture that such firms are more likely to need additional financing shortly after they go public. Finally we find that going concer warnings' issued by management or the investigating accountant for an IPO candidate are The convergent business sector'generally refers to those firms operating in the sectors of
3 generated by the print and electronic media, and hype derived from the equity market’s sentiment towards public offerings by technology firms. Previous research by Willenborg and McKeown (2000) suggests the role of going-concern opinions in reducing information asymmetry, and therefore ex ante uncertainty, for IPO candidates. We extend this research on the information content of audit qualifications issued preIPO to an Australian setting where recent amendments to the ASX Listing Rules have tempered the emphasis on profitability as a prerequisite to raising public equity. We also introduce a broader measure of ‘going concern warnings’ beyond an audit qualification designed to incorporate circumstances where investigating accountants may formally approve an entity’s accounts while implicitly questioning the ability of that firm to operate as a going-concern. We examine initial public offerings by technology companies on the ASX during 1999 and 2000. This two-year period includes a period of high growth expectations for technology stocks and a period of diminished expectations following the dramatic reduction in technology share prices that occurred in April 2000. By restricting our analysis to technology industry IPOs we examine variation within a relatively homogeneous sample of firms, but we expect crosssectional variation in underpricing and market hype surrounding these issues across the period examined. Our preliminary results indicate that the extent of underpricing is systematically related to variables measuring the hype surrounding the listing of an IPO candidate on the ASX. We find that the market sentiment as reflected in the underpricing of recent, comparable IPO candidates is systematically related to the underpricing performance of the current technology offerings. Excluding a few IPOs from the sample, based upon statistical criteria, there is greater underpricing of technology IPO candidates prior to the technology market correction in April 2000. Stock hype as measured by the print and electronic media coverage of IPO candidates in the period preceding their listing on the ASX is only marginally significant in explaining subsequent underpricing achieved upon listing for the full sample. The media coverage is associated with underpricing when extreme observations are excluded based upon statistical criteria. There is evidence that some Australian technology firms that experienced high underpricing also had a greater rate of cash burn, consistent with the conjecture that such firms are more likely to need additional financing shortly after they go public. Finally, we find that ‘going concern warnings’ issued by management or the investigating accountant for an IPO candidate are 2 The ‘convergent business sector’ generally refers to those firms operating in the sectors of
valuable in mitigating investors' ex ante uncertainty about the true' value of an offering, thereby reducing the subsequent level of underpricing achieved by that firm This paper is structured as follows. Section 2 discusses background literature with a focus on the theoretical models that have been developed in a US setting to explain underpricing. There is also consideration given to the direction that underpricing research has taken in an Australian etting. Section 3 is concerned with the development of hypotheses. Sample selection empirical design and the definition and measurement of explanatory variables used to test the hypotheses is considered in Section 4. Section 5 presents the empirical findings Concluding remarks are offered in Section 6 2. REVIEW OF PRIOR LITERATURE 2.1 General background An IPO is the first effort by private firms to raise capital in the public equity market. Many empirical studies have documented that IPOs are typically underpriced, that is, an investor who purchases new issues at the offering price can, on average, make relatively large returns Loughran and Ritter(2000)report that for the period 1990 to 1998, IPO candidates left over US$27 billion of potential IPO proceeds on the table' because of underpricing. For the same period, the first day returns of IPOs averaged approximately 15 per cent, indicating there is a systematic downward bias in the offer price compared with the price in the secondary trading market. However, recent years have witnessed unprecedented levels of underpricing driven largely by the spectacular stock exchange debuts achieved by firms with Internet-focused business models. Ritter(2001)reports that uS$65 billion was left on the table from all IPOs during 1999 and 2000 alone. Further, DuCharme et al. (2001)document that the mean(median) underpricing of 238 Internet IPOs listed in the US during the period 1988 through 1999 was a staggering 113. 8 per cent (45.6 per cent) Various theoretical models have been developed to explain underpricing as an equilibrium phenomenon in the IPO market. These include models based on the institutional framework hypothesis( Chalk and Peavy 1986, Finn and Higham 1988, and Taylor and Walter 1990), the litigation hypothesis(Tinic 1988), and the information asymmetry hypothesis, which includes consideration of reputation effects for auditors and underwriters of new issues(Titman and Trueman 1986, Beatty 1989, and Balvers, McDonald and Miller 1988)and the signalling telecommunications, information technology, electronics, multimedia, the Internet, or biotechnology Ibbotson and ritter(1993), How(1994)and Loughran et al. (1994)summarise international evidence of IPO underpricing, as well as potential determinants thereof
4 valuable in mitigating investors’ ex ante uncertainty about the ‘true’ value of an offering, thereby reducing the subsequent level of underpricing achieved by that firm. This paper is structured as follows. Section 2 discusses background literature with a focus on the theoretical models that have been developed in a US setting to explain underpricing. There is also consideration given to the direction that underpricing research has taken in an Australian setting. Section 3 is concerned with the development of hypotheses. Sample selection, empirical design and the definition and measurement of explanatory variables used to test the hypotheses is considered in Section 4. Section 5 presents the empirical findings. Concluding remarks are offered in Section 6. 2. REVIEW OF PRIOR LITERATURE 2.1 General Background An IPO is the first effort by private firms to raise capital in the public equity market. Many empirical studies have documented that IPOs are typically underpriced, that is, an investor who purchases new issues at the offering price can, on average, make relatively large returns 3 . Loughran and Ritter (2000) report that for the period 1990 to 1998, IPO candidates left over US$27 billion of potential IPO proceeds ‘on the table’ because of underpricing. For the same period, the first day returns of IPOs averaged approximately 15 per cent, indicating there is a systematic downward bias in the offer price compared with the price in the secondary trading market. However, recent years have witnessed unprecedented levels of underpricing driven largely by the spectacular stock exchange debuts achieved by firms with Internet-focused business models. Ritter (2001) reports that US$65 billion was left on the table from all IPOs during 1999 and 2000 alone. Further, DuCharme et al. (2001) document that the mean (median) underpricing of 238 Internet IPOs listed in the US during the period 1988 through 1999 was a staggering 113.8 per cent (45.6 per cent). Various theoretical models have been developed to explain underpricing as an equilibrium phenomenon in the IPO market. These include models based on the institutional framework hypothesis (Chalk and Peavy 1986, Finn and Higham 1988, and Taylor and Walter 1990), the litigation hypothesis (Tinic 1988), and the information asymmetry hypothesis, which includes consideration of reputation effects for auditors and underwriters of new issues (Titman and Trueman 1986, Beatty 1989, and Balvers, McDonald and Miller 1988) and the signalling telecommunications, information technology, electronics, multimedia, the Internet, or biotechnology. 3 Ibbotson and Ritter (1993), How (1994) and Loughran et al. (1994) summarise international evidence of IPO underpricing, as well as potential determinants thereof