PART 4: CAPITAL STRUCTURE AND PAYOUT POLICY12-3c NON-US INITIAL PUBLIC OFFERINGS
Relative to activity in the United States, the global market for IPOs has been growing rapidly for many
years. In terms of both the number of firms going public and the total capital raised, the US share of the
worldwide IPO market has been in decline for many years. Yet many of the same investment anomalies
documented in the United States are also observed internationally, and this is applicable to Australia and
New Zealand. First, non-US private-sector IPOs also demonstrate significant first-day returns that are
often much higher than for US IPOs. The figure in the ‘Finance in practice’ box above summarises IPO
underpricing studies from 43 different countries; all show significant underpricing, and 24 have mean
initial returns that are greater than the US average.
A second anomaly, common to both US and international IPOs, is that initial international offers
also may yield negative long-term returns. However, studies of non-US long-run returns are subject to all
the methodological problems bedevilling US studies (and perhaps even more), so it is unclear whether
international IPOs truly underperform or not.
Third, popular non-US issues also tend to be heavily oversubscribed, and the allocation rules mandated
by national law or exchange regulations largely determine which investors capture the IPO initial returns.
In many developing markets, there is a shortage of easily accessible investment opportunities. This can
create pent-up demand, meaning that when IPOs occur, they are often substantially oversubscribed
(meaning that there are not enough shares issued to meet the demand). This pushes up the post-IPO
prices, as can be seen in the Finance in practice section on page 449 showing average first-day returns on
IPOs for 43 countries. According to these results, the countries with the highest first-day returns tend to
be developing markets, with China and India being the worst offenders.
Fourth, hot-issue markets are as prevalent internationally as in the United States. Finally, taxation
issues (particularly capital gains tax rules) significantly affect how issues are priced and/or which investors
the offers are targeting.
Some international IPO markets do, however, differ in important ways from US markets. For example,
many governments impose politically motivated mandates on firms wishing to go public, requiring them
to allocate minimum fractions of the issue to their employees or to other targeted groups. Furthermore,
the net effect of pricing restrictions in many countries is to ensure that IPOs are severely underpriced;
this is especially common in countries where shares must be priced on a par-value basis and/or where
minimum dividend payouts are mandated. Some governments (even in advanced economies like Japan’s)
routinely prohibit companies from making IPOs during periods when market conditions are unsettled
and/or require explicit permission to be obtained before an IPO can be launched. Many countries require
that initial offering prices be set far in advance of the issue, which usually means that offerings that
actually proceed tend to be highly underpriced. Finally, non-US entrepreneurs often have different
motivations for taking firms public than do owners or managers of US private companies. Whereas
many US companies go public in order to acquire the equity capital needed to finance rapid growth,
continental European entrepreneurs go public mainly to rebalance their firms’ capital structures and
to achieve personal liquidity. Entrepreneurs from Australia and New Zealand tend to have similar
motivations to those from the UK, since they operate under very similar regulatory and legal frameworks.
These motivations tend to be closer to those of US entrepreneurs. This might be one of the factors that
explains why IPOs from the UK, US, Australia and New Zealand displayed a similar level of underpricing
in the chart included in the Finance in practice box on page 449.
On a more balanced note, most other countries place fewer restrictions on pre-offer marketing and
dissemination of information than do US regulators.LO 12.6Jay Ritter, University of
Florida
‘By the middle of
2001, 97% of Internet
companies were trading
below the offer price.’
See the entire interview on
the CourseMate website.Source: Cengage LearningCOURSEMATE
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