Underpricing And Crisis PDF Download

This paper investigates the level of underpricing of US IPOs before and during the Global Financial Crisis with regard to the role of the certification effect and investor confidence. Based on 514 observations the research builds on the work of Loughran and Ritter (2004) and compares regression models of the pre-crisis and crisis time period. It was found that the level of underpricing was 9.6% in the two years prior to the crisis in 2006 and 2007, while it decreased to 5.5% during the crisis in 2008 and 2009. Furthermore it was found that bank reputation is significantly positively correlated with a coefficient of 0.009 with the level of underpricing, confirming prior research and affirming the reversal of the original certification effect. Additionally, it was found that investor confidence has a significant beta coefficient of 0.003 over the entire time period, showing that investor confidence plays a significant role in the level of underpricing. This indicates that an inflated investor confidence can lead to "hot markets", driving underpricing. It is also shown that individual company risk has the biggest significant correlation with the level of underpricing and that this is the only relationship that is significant during the crisis period. The paper confirms that investors were extremely risk averse during the crisis period and placed an even higher discount on IPOs for the risk that they carried. Only the strongest companies could perform their IPO during the crisis. However the Global Financial Crisis had no significant impact on the US IPO market, instead the effects are attributable almost entirely to a temporary change in the risk composition of the IPO market.