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

Reber, Beat

Authors

Beat Reber



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 Mar 28, 2024
Journal International Review of Financial Analysis
Print ISSN 1057-5219
Electronic ISSN 1057-5219
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

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