The short-run equity underpricing puzzle in South Africa with an emphasis on the winner's curse hypothesis

• Main Author: Lattimer, Brandon Craig
• Format: Others
• Language: en
• Published: 2009
• Subjects: initial public offers; placements; hybrid offer; South African IPO; UK legal system sponsoring brokers; winner's curse hypothesis
• Online Access: http://hdl.handle.net/10539/6853

One of the puzzles regarding IPO’s is that the issuers rarely get upset about leaving substantial amounts of money on the table due to underpricing. The cost of underpricing is the number of shares sold multiplied by the difference between the first-day closing price and the offer price. The research sample of IPOs and JSE databases comprised, respectively, 160 and 321 new applicants for the years 1995-1999. New applicants comprising the research sample raised R12.55 billion with an underpricing cost exceeding R2.85 billion i.e., 22.71 percent of the IPO capital raised. This cost was found to be nearly 10 times greater than the R295 million paid in fees to the corporate advisors by the issuing companies. The prime beneficiaries of this discount were a select grouping of private placement investors at the discretion of the corporate advisors and directors. Mean unadjusted initial first day returns amounted to 55.04 percent. Public Offer IPO’s (solely or as a component of a Hybrid Offer) follow UK influenced corporate legal systems– both in legislative norm and empirical results. First day initial returns were presented per issuer List Board, Method and Type of Listing, IPO capital raised and disclosed use of proceeds. Internationally many theories have been raised as to what has become to be known as the short-run underpricing puzzle. The winner’s curse hypothesis is directly tested flowing from and the unique data availability. It was shown that South African Public and Hybrid IPO Offer methods bear an exceptionally close correlation to UK influenced corporate legal systems and as such proved a reliable empirical testing ground for the winners curse phenomena using the same methodology and equations as their international counterparts hereunder. The UK based corporate law and institutional arrangements in South Africa allow a direct test of the empirical implications of the winner’s curse hypothesis in pricing unseasoned new issues.