Does mispricing, liquidity or third-party certification contribute to IPO downside risk?

Reber, Beat

Abstract

This study analyses the impact of initial return, post-issue liquidity, and third-party certification on downside risk of initial public offerings (IPOs). Downside risk, measured by value-at-risk (VaR) and conditional value-at-risk (CVaR), draws upon Extreme Value Theory (EVT) and the Peak over Threshold (POT) approach. Initial return and downside risk exhibit a positive association which is consistent with a market-overreaction explanation but contradicts the validity of signalling models in which underpricing acts as a costly and difficult to imitate signal of firm quality. Post-issue liquidity, measured by seven distinct definitions to capture different aspects of liquidity, also has a positive association with downside risk. In contrast, third-party certification, measured by the reputation and size of underwriter syndicate and venture capital-backed IPOs do not persistently explain the variation in downside risk. Quantile regression analysis constitutes more rigour in the testing and offers new insights into the sensitivity among variables and their covariates at different quantiles of downside risk. While initial return affects downside risk evenly across the entire distri¬bution, quantile covariates for liquidity measures are statistically significant and generally outside the confidence interval of least squares regression coefficients. Sensitivity of liquidity measures is greater towards the upper end of the downside risk distribution.

Citation

Reber, B. (2017). Does mispricing, liquidity or third-party certification contribute to IPO downside risk?. International Review of Financial Analysis, 51, https://doi.org/10.1016/j.irfa.2017.03.001

• Journal Article Type: Article
• Acceptance Date: Mar 15, 2017
• Online Publication Date: Mar 21, 2017
• Publication Date: May 1, 2017
• Deposit Date: Mar 28, 2017
• Publicly Available Date: Sep 22, 2018
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Electronic ISSN: 1873-8079
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 51
• DOI: https://doi.org/10.1016/j.irfa.2017.03.001
• Keywords: Initial public offerings; Downside risk; Initial return; Liquidity; Third-party certification; Quantile regressions
• Public URL: https://nottingham-repository.worktribe.com/output/969600
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S1057521917300406
• Contract Date: Mar 28, 2017