The signalling hypothesis revisited: Evidence from foreign IPOs

Bill B Francis (), Iftekhar Hasan (), James R. Lothian and Xian Sun ()
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Bill B Francis: Lally School of Management and Technology, Postal: Rensselaer Polytechnic Institute (RPI) - Lally School of Management, Troy, NY 12180, United States, ,
Xian Sun: Office of the Comptroller of the Currency, USA

No 10/2008, Research Discussion Papers from Bank of Finland

Abstract: While the signalling hypothesis has played a prominent role as the economic rationale associated with the initial public offering (IPO) underpricing puzzle (Welch, 1989), the empirical evidence on it has been mixed at best (Jegadeesh, Weinstein and Welch, 1993; Michaely and Shaw, 1994). This paper revisits the issue from the vantage point of close to two decades of additional experience by examining a sample of foreign IPOs – firms from both financially integrated and segmented markets – in US markets. The evidence indicates that signalling does matter in determining IPO underpricing, especially for firms domiciled in countries with segmented markets, which as a result face higher information asymmetry and lack access to external capital markets. We find a significant positive and robust relationship between the degree of IPO underpricing and segmented-market firms’ seasoned equity offering activities. For firms from integrated markets, in contrast, the analyst-coverage-purchase hypothesis appears to matter more in explaining IPO underpricing and the aftermarket price appreciation explains these firms’ seasoned equity offering activities. The evidence, therefore, clearly supports the notion that some firms are willing to leave money on the table voluntarily to get a more favorable price at seasoned offerings when they are substantially wealth constrained, a prediction embedded in the signalling hypothesis.

Keywords: IPO underpricing; seasoned equity offering; cross-listing; signalling hypothesis; financial market integration; market-feedback hypothesis (search for similar items in EconPapers)
JEL-codes: G14 G15 G30 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fmk
Date: 2008-05-06
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Journal Article: The Signaling Hypothesis Revisited: Evidence from Foreign IPOs (2010)
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