As I presented in the previous sections, there are numerous explanations advanced to understand and to clarify the short run IPO anomaly. These explanations can be classified in three main categories:
– Explanations based on asymmetric information between the key IPO parties and have been considered the most convincing explanations for decades.
– Explanations asserting the informational transparency and lucidity and asserting the IPO market efficiency.
– And explanations based on Behavioral Approach and on investors’ sentiments and beliefs.
I regroup the three theories advanced in the same model to determine which of these explanations characterizes best the data in the context of a unified model and presents the most relevant and reliable explanation to underpricing phenomenon. I present every theory by one or more indicators and determinants.
– For the informational asymmetry theory, I use the firm quality as a determinant with many proxies: the Overhang Ratio, Venture Capital backed, Underwriter reputation and R&D intensity.
– For the theory asserting the IPO market efficiency, I use the risk determinant: age of the issuing firm, firm size (sales and assets), firm profitability, ROA and the issue risk (if the firm operates in a technological and risky sector). I use also the issue size (Ln (expected proceeds)), and the issuer bargaining power.
– Finally, for the behavioral approach, I use direct measures of investor sentiment, and I distinguish between the two types of investors: the individual investor sentiment and the institutional investor sentiment. For this, I use the individual investor sentiment index (AAII) and the institutional investor sentiment index (II).
The regression model used in this study is as follows:
Underpricing = a0 + a1Underwriter Reputation Dummy + a2Overhang + a3R&D Intensity + a4VC Dummy + a5Ln (1+age) + a6Ln (assets) + a7Ln (sales) + a8Firm Profitability + a9ROA + a10Issue Risk Dummy + a11Ln (expected proceeds) + a12Insiders Ownership + a13Institutional Ownership + a14Blockholders Ownership + a15Individual Investor Sentiment + a16Institutional Investor Sentiment+ a17Time Dummy + εi