Implications of Social Networks on Firm’s IPO Underpricing and Aftermarket Performance: Dissertation Proposal. Order here https://bit.ly/37e5wHC

Document Content and Description Below

Research Proposal Title: Implications of Social Networks on Firm’s IPO Underpricing and Aftermarket Performance Course Code: BEAM 027 Course Name: Dissertation for MSc Student Name: Yuchen Xu ... Student ID: 610001911 Supervisor: Joanne Horton Word Count: 16861 Implications of Social Networks on Firm’s IPO Underpricing and Aftermarket Performance 1. Background The underpricing of initial public offerings (IPOs) has been widely documented in different markets, which means the initial offering price is frequently lower than the closing price on the first trading day. Such a long established underpricing puzzle has attracted extensive notice attempting to explain the financial anomaly. Among these theoretical explanations, IPOs underpricing is generally explained with information asymmetry in the capital markets since the market and the firm are asymmetrically informed about the true value of the firm. The well-known winner’s curse model, established by Rock (1986) assumes that only random group of investors are informed about the firm’s value, and underpricing compensates those uninformed investors for their biased purchases of lower value firms. Consistent with the winner’s curse hypothesis, Michaely and Shaw (1994) show that IPOs are not underpriced if investors know they do not compete with informed investors in markets, which implies that an increase in information homogeneity should alleviate this adverse selection problem. Likewise, Beatty and Ritter (1986) demonstrate that there is a positive relation between the expected underpricing and the uncertainty of investors regarding the IPO firm’s value. A large volume of literature has been consisted with the asymmetric information explanation. For instance, Schenone (2004) finds that firms with an established banking relationship with a prospective underwriter face about 17% lower underpricing than firms without such pre-IPO relationships. Similarly, An and Chan(2008) suggests that credit ratings convey useful information in reducing value uncertainty of the issuing firms as well as information asymmetry among the players in the IPO markets, consequently significantly lower the IPO underpricing and decrease aftermarket volatility of IPO stocks. In terms of underwriters, Carter and Manaster (1990) suggest that prestigious underwriters, in order to preserve their reputation, will use private information unavailable to the public when screens the firms that go public and selects the2 less risky ones, which diminishes the uncertainty and information asymmetry between informed and unformed investors. In addition to this, IPOs managed by more prestigious underwriters have better long-run performance (Michaely and Shaw, 1994; Su and Bangassa, 2011) and Brav and Gompers (1997) find that venture-backed IPOs outperform nonventure-backed offerings in the five-year period following the offer. All of these findings are related to asymmetric information, which implies that an issuing firm would have an incentive to disclose information voluntarily in order to reduce undrepricing. Since social capital literature suggests that social networks facilitate access to a broader source of information at a lower cost and help individuals gain access to relevant and timely information (Adler and Kwon, 2002), it is reasonable to assume that social networks can reduce information asymmetry between firms and investors. In other words, the better connected you are, the more information you can give to the network, and the quicker your information would go around people. For example, if a person is a non-executive director on Firm A and also an executive director of an IPO Firm B, he spreads this information to the directors in Firm A. Because of his good reputation, people know more about the firm value according to their social networks and are willing to believe the IPO. As a consequence, the reduced asymmetric information lessens the need to underprice. However, until now the literature has largely disregarded the impact of firms’ social networks on the IPOs underpricing. Given prior evidences reporting a negative correlation between asymmetric information and underpricing, the relation between firm’s connectedness and IPO underpricing is expected to be negative. I intend to investigate this hypothesis. In addition, since Horton et al (2009) find connectedness is positively associated with firm’s future performance. I would also like to test whether IPO firm’s social network would have a positive impact on its aftermarket performance. 2. Research aim and objectives Based on the two aspects of literature discussed above, my research is aimed at examining two hypotheses: H1: The firm’s connectedness is negatively associated with the degree of IPOs underpricing H2: The firm’s connectedness is positively associated with its aftermarket3 performance. In order to achieve this aim, the research has the following objectives: 1. based on the social capital theory and techniques developed in social network analysis, construct a complete inter-locking directorship network and measure the firm’s connectedness by aggregating individual director’s connectedness. 2. Set regression models with social network measure and other additional control variables to exam the hypotheses mentioned above. 3. Research methodology 1. Search academic articles relating to IPOs underpricing and social network theory from databases such as JSTOR and EBSCO and read them carefully and critically. 2. Obtain the sample of UK IPOs issued on the London Stock Exchange over the period January 2001 to December 2008 from Thomson Financial SDC Database, download prospectus documents of each firm from Thomson One Banker, and collect each firm’s executive and non-executive directors’ name to construct a complete interlocking-directorship network. Other accounting data such as debt to asset ratio are supplemented from DataStream. 3. Employ ordinary least squares (OLS) regressions to examine the explanatory power of social network measures on IPO underpricing and future performance. The regression model includes additional control variables which capture possible determinants of IPOs underpricing is in the following form: Underpricingi or Performancei= α + β1 Social network measurei + β2 Firm characteristicsi + β3 IPO characteristicsi + β4Controlsi + εi Where Underpricingi is the percentage difference between the offer price and the closing price of the first trading day for firm I. Performancei is the firm post total stock return over the subsequent one4 -,two- and three-year period. Social network measurei is the aggregated value of individual director’s connectedness in firm i. Firm Characteristicsi is a set of control variables that can drive IPO underpricing and affects future performance, including firm size (calculated as the logarithm of assets) and firm’s age at the time of IPO, as Ritter (1984) illustrates that larger and older firms are underpriced less because they are better known and have fewer information problems in the capital markets. I also capture the firm’s leverage by using debt to assets ratio at the IPO year. Prior research like James and Weir (1990) and Schenone (2004) find that more leveraged firms are less underpriced because debt signals high-value firm and can reduce asymmetric information. Followed by An and Chan’s (2008) finding that credit ratings diminish value uncertainty of the issuing firms and information asymmetry in the IPO market, I include credit rating as a dummy variable which equals to one if the firm has a credit rating when going public and zero otherwise. Besides, there is a relation between venture backing and IPO underpricing (Coakley et al, 2009; Megginson and Weiss, 1991). Therefore, I control this as a dummy variable with venture-backed IPOs set to one. Following previous research, I control for IPO characteristics as well. Firstly, issue size, measured by the logarithm of the proceeds is controlled as firms with higher IPO proceeds are underpriced less (Beatty and Ritter, 1986). Besides, following Coakley et al, 2009), I calculate percentage return on the FTSE All Share index during the 15 trading days preceding the IPO as a proxy for prior market movements before the offer date. Moreover, since Hanley(1993) finds that underpricing is positively associated with the degree of price revision, the effect of price revision during the IPO process should be included in my model by calculating as the percentage difference between the offer price and the midpoint of the filing range. Furthermore, several research findings (Carter and Manaster,1990; Su and Bangassa, 2011) demonstrates that the underwriters reputation has an effect on the degree of IPOs underpricing. Hence, I measure underwriter reputation as a dummy variable which coded one if the IPO’s lead underwriter is listed in the top-ten in annual Hambro underwriter rankings. Similarly, accounting firm reputation is also included as a dummy variable coded one if the ‘big four’ is the auditing firm, and zero otherwise. In addition,5 there are differences in the extent of underpricing for the different types of offerings (Parsad, 1994) and Barry (1989) argues that pure primary offerings are expected to be positively related to IPO underpriced. So I control this effect by introducing another dummy variable with pure primary offerings equals to one and zero otherwise. Finally, I control for the time and industry fixed effect as dummy variables. 4. Contribution and limitations As the use of social network analysis is relatively infrequent in accounting and finance research, my research will give an additional perspective to explain the degree of IPOs underpricing and adds evidence to support the information asymmetry explanation of IPO underpricing if the results verify my hypothesis. Moreover, it will also contribute to the growing literature on social network effects in economics. However, the constructed social network is incomplete and there is a possibility of a correlated missing variable driving the results. 5. Proposed structure and timetable The dissertation is presented in six chapters as follows: 1. Introduction This chapter outlines the background of IPO underpricing and social network theory and defines the objective of my dissertation. It also gives a summary of what is to follow in the remainder of the dissertation. 2. Literature review Relevant academic papers are critically taken into consideration and integrate them into my research in order to develop my hypotheses. 3. Sample It describes the data, as well as source of data that I will use and provide the complete and clear discussion of all the selection procedures that I used in generating my final sample.6 4. Methodology This chapter states the regression model with detailed description of each variable in the model. 5. Results This chapter presents the results with a detailed analysis and interpretation. 6. Conclusion It summerise the main conclusions of my dissertation and notes the contributions and limitations. The schedule of doing this dissertation is as follows: 1. Collect all the necessary data, hopefully, by the end of the June. 2. Analyse the data and run the regression in the following one week 3. Write the whole dissertation and submit the full draft by the middle of August. 4. Polish up my dissertation and submit the final dissertation by the early of September References Adler, P.S. and S. Kwon (2002), ‘Social capital: Prospects for a New Concept’, Academy of Management Review, vol.27, no.1, (January), pp.17-40 An, H. and K.C. Chan (2008), ‘Credit ratings and IPO pricing’, Journal of Corporate Finance, vol.14, pp.584-595 Barry, C.B. (1989), ‘Initial public offering underpricing: the issuer’s view-a comment’, Journal of Finance, vol.44, no.4,(September), pp.1099-1103 Beatty, R.P. and J.R. Ritter (1986), ‘Investment banking, reputation, and the underpricing of initial public offerings’, Journal of Financial Economics, vol.15, pp. 213-2327 Brav, A. and P.A. Gompers (1997), ‘Myth or reality? The long-run underperformance of initial public offerings: Evidence from venture and non-venture capital-backed companies’, Journal of Finance, vol.52, no.5,(December), pp.1791-1821 Carter, R.B. and S. Manaster (1990), ‘Initial public offerings and underwriter reputation’, Journal of Finance, vol.45, no.4, pp.1045-1067 Coakley, J., L. Hadass, and A. Wood (2009), ‘UK IPO underpricing and venture capitalists’, The European Journal of Finance, vol.15, no.4, pp.421-435 Hanley, K.W. (1993), ‘The underpricing of initial public offerings and the partial adjustment phenomenon’, Journal of Financial Economics, vol.34,pp.231-250 Horton, J., Y. Millo, and G. Serafeim (2009), ‘Resources or Power? Implications of Social Networks on Compensation and Firm Performace’(June), 1-46 [online] Available from: http://ssrn.com/abstract=1416935 [Accessed: 28/02.2012] Megginson, W.L. and K.A. Weiss (1991), ‘Venture capitalist certification in initial public offerings’, Journal of Finance, vol.46, no.3, pp.879-903 Michaely, R. and W.H. Shaw (1994), ‘The pricing of initial public offerings: tests of adverse-selection and signaling theories’, Review of Financial Studies, vol.7, no.2, (Summer), pp.279-319 Prasad, D. (1994), ’Is underpricing greater for mixed offerings as compared to pure primary offerings in the OTC market’ Journal of Financial and Strategic Decisions’,vol.7,no.1,(Spring), pp.25-31 Ritter, J.R. (1984), ‘The hot issue market of 1980’. Journal of Business’, vol.57, no. 2, (April), pp.215-240 Schenone, C. (2004), ‘The effect of banking relationships on the firm’s IPO underpricing’, Journal of Finance , vol.59,no.6,(December), pp.2903-2958. Su, C. and K. Bangassa (2011), ‘Underpricing and long-run performance of Chinese IPOs: the role of underwriter reputation’, Financial Markets and Portfolio Management, vol.25, no.1, pp.53-74 [Show More]

Last updated: 2 years ago

Preview 1 out of 8 pages