280 B.E. Eckbo et al.
Ta b l e 9
Summary of determinants of underpricing in IPOs and SEOsVariables with significantly positive effects Variables with significantly negative effects
A. Issuer characteristics
Firm size Log of prior stock price
Technology issuer Log of total sales
Internet issuer Log of book to market
Prior cumulative stock return Issuer profitability
Stock return’s (or residual) standard dev. or variance Percentage of tangible assets
Nasdaq listing Firm age or Log(1+firm age)
Stock with listed options NYSE/Amex listed; Stock beta; Leverage; Prior SEO
indicator; Utility issuer
B. Offer characteristics
Log of offer price Log of offer size
Offer price is an integer Log of offer price∗best effort
Offer price tick size less than 0.25 Inverse of offer price
Offer price revision from midpoint of filing range Underwriter rank (market share)
Proceeds used for operating expenses Underwriter rank∗firm commitment
Targeted direct share purchase programs Lead underwriter not in the top 25
Log(1 + listed risks in SEC filing) Qualified independent underwriter employed
Abnormal short interest in stock Over-allotment option used
Estimated likelihood of a lawsuit Auditor market share
Underwriter rank Big 6 auditor
Underwriter with top tier analyst Legal compensation
Herfindahl index for investment banking Prior week cumulative stock return∗Rule 10b-21
Lead underwriter not in top 25 Log of prior stock price∗indicator of offer price tick
size less than 0.25; Filing to offer date interval;
Estimated probability of offer withdrawal
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To analyze the potential interdependence of spread and underpricing,Kim, Palia, and
Saunders (2005a)employ three stage least squares to estimate the jointly determined
underwriter spread and underpricing, which they note gives consistent estimates. They
find three instruments that are significantly related to spreads, but not to underpricing
(existence of a star analyst, issuers lacking two years of financial statements at the IPO
date, standard deviation of daily stock returns for one year), and one instrument related
to underpricing, but unrelated to spreads (market run-up over the prior 15 trading days).
They point out that this interdependence raises some serious questions about the relia-
bility of many earlier studies, which focus exclusively on underpricing or underwriter
spreads, and generally do not control for the potential interdependence of these two
flotation cost components. While the study makes a strong case for interdependence
of underpricing and spreads, it is less convincing in its claims about the appropriate
instruments needed to identify their three equation system.