Steven Xiaofan Zheng

Underpricing, Share Retention, and the IPO Aftermarket Liquidity

Purpose – To test the effects of underpricing and share retention (i.e. the proportion of shares retained by the pre-initial-public-offering (IPO) owners) on IPO aftermarket liquidity. Design/methodology/approach – Uses both percentage spread and turnover ratio to measure liquidity. The percentage spread is the quoted bid-ask spread divided by the quoted midpoint and measures the trading cost relative to share price. Turnover ratio is the daily trading volume divided by the number of shares offered and measures the speed of transaction. Both non-parametric analyses and multiple regressions are conducted to investigate the effects of underpricing and share retention on liquidity. Findings – Results indicate that initial return is positively related to turnover ratio and negatively related to percentage spread. These relations are significant even after controlling for other factors. Also finds that the pre-IPO owners’ retention rate is positively related to turnover ratio and negatively related to percentage spread. High retention rates attract more trades, provide quality assurance, and improve IPO aftermarket liquidity. Originality/value – This paper investigates the theoretical links between underpricing and liquidity and provides direct evidence on Booth and Chuas liquidity theory. In addition, this is one of the first empirical studies to analyze the effect of share retention on aftermarket liquidity.

The Effect of Internal Control Weakness on Firm Valuation: Evidence from SOX Section 404 Disclosures

We find that firms reporting internal control material weakness (ICW) under Section 404 of Sarbanes–Oxley Act (SOX) have 13% lower valuation than non-ICW firms based on Tobins q. This valuation difference is mainly driven by stock underperformance of more than 13% during the year before ICW disclosure. The ICW firms that remedy the internal control weakness in the subsequent year have much better stock performance compared to those firms that fail to remedy existing ICW problems. We further show a better stock performance in the year before disclosure if a SOX 404 ICW firm has prior SOX 302 ICW disclosure more than one year earlier. All these results are consistent with the hypothesis that the equity market has incorporated the negative information associated with SOX 404 ICW reports before the actual disclosures are made.

IPO Offering Size and Analyst Forecasts

In this paper, we examine how analysts react to IPO percentage offering size. We find that analysts predict lower long-term earnings growth rates for IPOs with larger percentage offering size. The sizes of both primary and secondary offering are negatively related to long-term growth rate forecasts. We find evidence that the free cash flow effect may be related to the negative relation between primary offering size and growth forecast.

Misleading Results in Regression Tests about Signaling and the Valuation of IPO

Abstract We examine the regression model used in the literature to test the signaling model in Leland and Pyle [7] and find that the model may produce positive and significant coefficients for the independent variables even when the inputs are randomly generated. The problem is illustrated by two examples: a theoretical proof based on a uniform distribution and a bootstrap simulation based on actual data. Our studies show that the misleading results are caused by some natural constraints in the regression model.