Analysis of IPOs

B a b s o n C o l l e g e

P r o f e s s o r D r . M i c h a e l

G o l d s t e i n

F I N 3 5 6 0

D e c e m b e r 3 , 2 0 1 2

Financial Markets and

Instruments

Fall 2012

“We pledge our honor that we have neither received

nor provided any unauthorized assistance during the

completion of this work”

George Philip Crisp, 1

Ilias Larsino, 1

Felix Reisser, 2

Siddharth Saxena, 1

2

Executive Summary:

One of the main exit strategies or methods to raise capital for owners of companies is

through an Initial Public Offering (IPO). This paper provides an introduction and process of IPOs

as well as an in-depth look at to the highly controversial theory of underpricing. The theory that

most IPOs are underpriced sparks the flame of much research and discussion of the conflicts of

interest that arise in the current set up of the IPO process in general. We were able to test a few

hypotheses through multiple regression analysis. Multiple regression analysis to determine if and

what variables are correlated to further our understanding of this integral part of many large

companies’ life cycles. When comparing average first day return to number of IPOs closed, there

was no correlation between the two variables which suggests that no matter how many IPOs took

place within the year, the price pop on the first day was not affected. We were also able to realize

that number of underwriters vs. cross spread (cost for underwriters) was related. Logically, more

underwriters create more competition resulting in a lower cost for an IPO. There was also strong

positive correlation between the higher the underpricing of the stock with the higher the amount

left on the table. Naturally, the lower the initial price the more room the stock has to jump on the

first day of trading. IPO turnover (the amount of stock traded on the first day dived by the total

shares issued) versus the first day return resulted in high correlation as well as the more hype and

excited is created about the transaction the more the stock is traded leading to more return for

early investors who were able to capitalize on the underpricing. Finally we were able to deduce

that it is wiser for short-term investors to capitalize on the price pop of smaller companies on the

first day rather than invest in larger company IPOs. Whereas, it became statistically apparent that

a long-term investor should do exactly the opposite by investing and holding larger company

IPOs over the long run.

3

Companies can be characterized as either private or public. Private companies are owned by a

relatively small number of shareholders. Their shares are not traded publicly in stock exchanges.

On the other hand, public companies’ shares are traded publicly and hence, each shareholder

owns a fragment of them. Consequently, they might have hundreds of thousands of owners.

The life cycle of a company begins when a private, small company starts by raising capital from

some investors. Early stage investors usually fall into three categories: friends and family, angel

investors, or venture capitalists. These investors have more risk due to the illiquid nature of their

stocks as they do not have the opportunity to sell their stocks in an open stock exchange/market1.

As a result, they are not willing to keep funneling money into the venture. Ultimately, the goal is

to expand the company. However, for further growth, further funding is needed. At this point,

funding is achieved either by borrowing (debt) or by issuing stock (equity). The stocks of a

company need a market in order to be publicly traded. Hence, a private company which decides

to issue stock to the public in order to raise capital, has to go public. This is achieved through the

initial public offering (IPO) of part of its stocks.

An IPO, essentially, is “the first sale of stock by a private company to the public”2. When a

company decides to go public it usually by issuing 20-30% of its shares3. In this process there are

a lot of steps which have to be cautiously taken. Initially, an investment bank has to be hired. The

institution will basically choose the price in which the stock will open on day 1, and will create an

initial market for the stock. It is responsible, also, for the “underwriting” of an IPO. Underwriting

is the process by which money is raised through equity. There are basically two types of

“underwriting”: “firm commitment”, in which the purchase of the complete offer is guaranteed by

the underwriter, and “best efforts agreement” in which the stock is sold on behalf of the company

1 Dartmouth College, “Monetta Financial Services Inc.”

2 Investopedia, “Initial Public Offering – IPO”

3 Nicole Lee, “The Initial Public Offering (IPO) Process: Got Facebook Shares?”

4

by the underwriter without any guarantees on the capital that will be raised4. Usually, more than

one investment banks are hired, forming a “syndicate”, with one of them being the “lead

underwriter” aiming to reduce their risk5. Recently, firm commitment underwriting is much more

common in practice.

After this, extensive due diligence is conducted to the company. Accountants scrutinize the

financial statements to make sure the legitimacy of the endeavor, lawyers review the binding

legal documents of the company In order to get a more spherical opinion of the company, the

investment bank conducts market research. Customers are also contacted and asked about their

experiences with the specific company.

Once the due diligence is complete, the S-1 registration statement is filed to the Securities and

Exchange Commision (SEC). The S-1 contains information such as the company overview,

financial performance, and risk factors. An initial prospectus, known as the “red herring”,

contains information for potential investors and also a price range that the institution expects the

stock to trade at.

The SEC starts reviewing the company and the S-1 to make sure that the required information is

included. During this, so-called “cooling off period”, both the company and the institution do not

stop working on the matter. It is time for the “dog and pony show”, in other words meetings are

arranged with chosen, large, institutional investors to whom the red herring is shown. There are

various reasons for which this type of investors are chosen. Firstly, individual investors can

usually only participate on an IPO through personal accounts in institutions that participate on the

IPO. Secondly, if the bank shows an IPO to an institution which will make money for the latter,

the former might earn more business, and hence more money, with it in the future. Thirdly, if for

example a firm/company files for IPO, institutions that have participated in the past in relevant

4 Jason Draho, “The IPO Decision: Why and How Companies Go Public”

5 Fidelity Investments, “Stock Faqs: IPOs”

5

IPO’s will be targeted. Finally, if the bank earns a lot of money in brokerage commissions from a

specific institution, it tends to show the latter a good investment idea6.

The “dog and pony show” is significantly important because in the case that the investors are

interested they state the amount of shares they would be willing to buy and at what price.

Therefore, an indication is given on how the company’s IPO will be perceived by the market. The

underwriter gets a better sense of what the price should be by calculating the subscription ratio

(tentative purchase orders/total number of shares available). By matching demand and supply the

calculated price reduces the risk of a very unsuccessful IPO.

Given that the SEC approves the S-1, when the “dog and pony show” is over, the underwriters

meet with the management team of the company and agree on the opening price of the stock

based on the orders received and the condition of the market. The higher the demand, the higher

the price of the stock as set by the underwriter. In some cases, a revision is made to the SEC to

raise the price of the company’s stock from what was initially filed to what the current demand

seems to dictate. There is a limitation, however, on what the price will be: usually it is placed,

usually 15%, lower than the estimated market price7. Consequently, the stock does really well on

the first day sending the market a strong, positive message about the company.

At that point, the shares are allocated to the investors. Sometimes a conflict of interest arises since

the management of the company wants investors who are planning on the long term while the

bank might be inclined to “help” investors, such as hedge funds, who generate bigger

commissions for them but who are planning to invest in the short term.

6 Nicole Lee, “The Initial Public Offering (IPO) Process: Got Facebook Shares?”

7 Dartmouth College, “Monetta Financial Services Inc.”

6

Finally, on the specified by the SEC date, after the market closes, the price is announced and the

stock starts trading the next morning.8

There are both advantages and disadvantages for a firm that decides to issue an IPO. On the plus

side, it immediately accesses capital that can be used, for example, for a strategic acquisition. The

company has opened its “doors” to the world and the world has money. By making the correct

moves the stock price will keep increasing and as a result there will be more money available for

the realization of the various goals. Additionally, the liquidity risk that the initial owners had

faced is avoided since after the IPO they can sell their shares whenever they want9.

Moreover, the company enjoys great publicity with the IPO. If this is correctly exploited it might

even lead to increased market share. Mergers and acquisition of the company become easier since

the market has concluded in its market capitalization based on its performance and thus, no

extensively complicated tasks (such as valuation) need to take place in the event, for example, of

a merger. Finally, by becoming public, the company has a way to motivate its employees to be

more efficient by offering them stock options.

On the other side, issuing an IPO is very expensive ($250,000 to 1 million) because of the various

fees such as accounting and legal fees and if the S-1 does not get approved by the SEC, the

money is lost. Additionally, the management will have to focus on the process and, as a result, the

operations might be neglected for that time10

. Furthermore, the company will start being under

close supervision and it will have to publish information that it would rather keep secret from its

competitors. Also, since more people will have a say on the company’s strategy, decisions will

take longer to be made and thus, opportunities might be lost. The management also will be

exposed to civil liability for any possible misrepresentation of the financials and also more

8 Nicole Lee, “The Initial Public Offering (IPO) Process: Got Facebook Shares?”

9 U.S. Equities, “IPO Advantages”

7

controlled by the shareholders11

. Consequently, they might refrain to take actions that they would

have done if they were not public due to fear of unemployment or even jail. Finally, there is the

risk of a hostile takeover of the company’s shares by a competitor since they are in the market.

The recent recession affected IPO’s. Investors became less confident in the market and given the

risk embedded in an IPO, were reluctant to participate in investment opportunities. The trend was

towards safe investments. From 2004 to 2007 there was an average of 161 IPO’s per year; the

average during the period 2008-2009 was 3212

.

Another reason for the reduced number of IPO’s is that companies did not want to go public

under these market conditions because they would achieve a much lower price for their stock

compared to doing their IPO under normal market conditions. Additionally, it would be much

harder for the stock to appreciate significantly given that it would begin trading at a low price.

Moreover, by lowering the interest rates the Federal Bank made it cheaper for companies to

borrow. Consequently, firms preferred to use loans, instead of selling shares publicly, for their

funding.

There is also another aspect of a company proceeding to an IPO. Most people tend to think of an

IPO as a beginning, the start of a new chapter for a company’s life. However, throughout history,

we have indications that people saw it as an exit strategy from their own effort. Investors who

believed in the ideas and passion of entrepreneurs and who invested their money in a start-up

might, for various reasons, want to get their money back. Through an IPO, they have the

possibility to get back their investment along with a great return that can be achieved through this

process. As a result, they do an IPO perceiving it as the tool to enjoy the return of their initial

investment-an exit strategy from the company.13

10

Lewis and Kappes, “The advantages and disadvantages of going public” 12

Jay R. Ritter: “Initial Public Offerings: Price Revision Statistics through 2011” 13

Nicole Lee, “The Initial Public Offering (IPO) Process: Got Facebook Shares?”

8

In this section we are going to examine the puzzling phenomenon of IPO underpricing.

“Underpricing refers to the price run up of the IPO on the first day of trading. It is also known as

the initial return or first-day return” (1)

.A lot of economic research has been done into the

rationale behind underpricing because “In an efficient and perfect market, theory suggests,

companies should not leave ‘money on the table’, certainly not in such large quantities”(2)

. IPO

underpricing is a worldwide phenomenon and there are many theories attempting to comprehend

its use.

The first and most widely accepted theory is that of Information Asymmetry. This is similar to

the George Akerlof’s “lemon theory” which suggested that uninformed investors will bid on used

cars, or in our case IPO’s without regard to the quality of the IPO. On the other hand, informed

investors will only bid on IPO’s that they believe will yield superior returns. This leads to a

problem where weaker IPO’s are unable to attract the informed investors so only uninformed

investors will bid and eventually lose their money. Underwriters need these uninformed investors

to bid because there are not a sufficient number of informed investors and so often the IPO is

underpriced to ensure that there is enough demand from uninformed investors.(3)

In this section we are going to examine the puzzling phenomenon of IPO underpricing.

“Underpricing refers to the price run up of the IPO on the first day of trading. It is also known as

the initial return or first-day return”14

.A lot of economic research has been done into the

rationale behind underpricing because “In an efficient and perfect market, theory suggests,

companies should not leave ‘money on the table’, certainly not in such large quantities”15

. IPO

14 (Booth, L. (). The Cost of Going Public: Why IPOs Are Typically Underpriced. Available:

http://www.qfinance.com/financing-best-practice/the-cost-of-going-public-why-ipos-are-typically-underpriced?full.

Last accessed 12/02/2012.)

9

underpricing is a worldwide phenomenon and there are many theories attempting to comprehend

its use.

The first and most widely accepted theory is that of Information Asymmetry. This is similar to

the George Akerlof’s “lemon theory” which suggested that uninformed investors will bid on used

cars, or in our case IPO’s without regard to the quality of the IPO. On the other hand, informed

investors will only bid on IPO’s that they believe will yield superior returns. This leads to a

problem where weaker IPO’s are unable to attract the informed investors so only uninformed

investors will bid and eventually lose their money. Underwriters need these uninformed investors

to bid because there are not a sufficient number of informed investors and so often the IPO is

underpriced to ensure that there is enough demand from uninformed investors.16

Another theory relates to the book building process that underwriters use to gain information

about the demand for an IPO from potential investors. Investors bid on the number of shares they

want to buy and at what price and then the Investment Bank selects the shares with the highest

bid until the order is completed. If an investor bids low then then they are less likely to obtain the

number of shares that they bid for resulting in potential buyers requesting more shares than they

really want. This is another case of information asymmetry which results in the underwriters

discounting the stock in order to promote aggressive bidding. IPO issuers are happy for the

underwriters to use this technique as it usually results in a higher sales price.16

Research has suggested that Investment Banks have a conflict of interests when it comes to the

amount by which they are underpricing the IPO. “The investment bank conflict theory posits that

investment banks arrange for underpricing as a way to benefit themselves and their other

clients”.16

Research has shown that investment banks do respond to incentives such as higher

15

(Jenkinson, T. Ljungqvist, A. (2001). Going Public, The Theory and Evidence on How Companies Raise Equity Finance

. 2nd ed. New York: Oxford University Press. Pg 41) 16

(Davidoff, S. (2011). Why I.P.O.'s Get Underpriced. Available: http://dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-underpriced/. Last accessed 12/02/2012.)

10

underwriting fees to reduce underpricing. Also when the underwriter’s stake in the IPO is great,

the severity of the underpricing appears to decrease. Finally there is also risk as there is evidence

supporting the statement “that underwriters who incorrectly underprice their business do lose the

chance for future I.P.O.’s 16

.

The managerial conflict theory suggests that the management within the company is “bribed” by

the underwriters to underprice the IPO in exchange for receiving the underpriced stocks, but are

unable to sell for a fixed period of time, normally six months. Along with the underwriter they re-

price the IPO in order to create excessive demand so that the price increases and the shareholders

can make a profit once the lockout period has ended. This is known as IPO Spinning and leads to

a conflict of interests where the management wants a lower price that results in a dilution of the

firm value. The main argument here is that the management should always be trying to maximize

the shareholders’ value and this dilution acts against the economic interests of the shareholders17

.

There are explanations for the way underwriters act with regard to underpricing. It is widely

accepted that “institutional investors or managers gain from taking advantage of retail

shareholders who act irrationally or otherwise against their economic interests. And that both

institutional shareholders and managers therefore underprice I.P.O.’s to lock in these gains”16

.

An extreme example of severe underpricing is that of LinkedIn which saw huge increases in the

value of its shares after its IPO. LinkedIn had hired both Morgan Stanley and Bank of Americas’

Merrill Lynch to manage the IPO. They concluded that the shares should be priced at $45.

However the opening price was nowhere near this value and was in fact $83 per share. The issue

with this for LinkedIn was that although they raised the capital that they required, hundreds of

millions of dollars that should have gone to LinkedIn ended up with institutional investors that

were favored by the investment banks. “As Eric Tilenius, the general manager of Zynga, wrote on

Facebook: ‘A huge opening-day pop is not a sign of a successful IPO, but rather a massively

17

Interview with L. Krigman

11

mispriced one. Bankers are rewarding their friends and themselves instead of doing their

fiduciary duty to their clients’”18

. LinkedIn is an extreme example and is the 5th best ever first day

IPO performance19

and so some other companies have taken a different approach for their IPO.

A good example of this is Google who did not use the investment banks and instead had a Dutch

Auction. Google was successful with this approach although the share price opened ($100) 17.6%

higher than the offer price ($85). The Dutch auction technique has many advantages and

disadvantages. “It increases the ability of small investors to participate in the IPO process, and

minimizes the traditional dominance of larger institutional investors who were lucrative clients of

the underwriting investment bank. On the other hand, small investors may lack the ability to

efficiently price an IPO due to lack of information” 20

.Another problem with the Dutch auction

method is that a smaller less well known company than Google may not have the same publicity

and be able to stimulate interest amongst smaller investors. A controversy with the Google case is

that the increase between the offer price and the open price of the IPO was not minimized. In fact,

“83 percent of the IPOs issued between January and November 2004 experienced less of a jump

from the offer price to the open price than Google did.”(7)

It cannot be said however that this

would be the case for all companies.

Google is the most widely known example of a company choosing not to use the investment

banks to assist in the IPO process. Google currently has a stock price of $698.3721

so appears to

have been successful since its IPO. This is the most common approach that firms take, instead of

18

(Nocera, J. (2011). Was LinkedIn Scammed?. Available:

http://www.nytimes.com/2011/05/21/opinion/21nocera.html?ref=global. Last accessed 12/02/2012.) 19 (Fink, J. (2011). LinkedIn IPO Skyrockets: Huge Success or Shareholder Ripoff?. Available:

http://www.investingdaily.com/11268/linkedin-ipo-skyrockets-huge-success-or-shareholder-ripoff. Last accessed 12/02/2012.)

20 Hensel, N. (2005). Are Dutch Auctions Right for Your IPO?. Available: http://hbswk.hbs.edu/archive/4747.html. Last

accessed 12/02/2012.)

21

Yahoo Finance (12/02/2012)

12

using the investment banks, in order to try to reduce the underpricing that underwriters commonly

used to help institutional investors make an easy profit.

Regression Analysis

Regression Analysis: Average First Day Return versus Number of Offerings

Based on the regression analysis, we can say that there is no statistically significant correlation

between the first day return and the number of offerings. Regardless of whether a lot or few

companies go public in one year, early investors can make great profits benefiting from

underpricing. First day returns have been outstandingly high in 1999 and 2000, 70.9% and 56.4%

respectively. It perfectly shows how the dotcom bubble blew up in these years (Exhibit 1). 22

Regression Analysis: Number of Underwriters versus Gross Spread

The correlation between the number of underwriters and gross spread is slightly negative. This

means that the more underwriter work for an IPO the lower is the gross margin. More

competition between the underwriting companies lowers their gross margin. There is also a trend

showing that companies are using more underwriters for their IPO. Taking the correlation into

consideration one can say that IPOs are getting cheaper for companies who are going public

(Exhibit 2). 23

22

Jay Ritters Hompage, IPO Data, IPOs 2011 Underpricing: http://bear.warrington.ufl.edu/ritter/IPOs2011Underpricing1912.pdf 23

Jay Ritters Hompage, IPO Data, IPOs 2011 Underwriting: http://bear.warrington.ufl.edu/ritter/IPOs2011Underwriting1912.pdf

13

Regression Analysis: Aggregate Amount left on the Table versus Average First Day Return

The regression analysis for the aggregate amount left on the table and the average first day return

show a statistically significant positive correlation. The higher the money left on the table the

higher the average first day returns. Additionally, the more underpriced a stock is, the more likely

it is going to pop up at the first day. This corresponds with the theory of underpricing. The more a

stock is underpriced, the more money is left at the table (Exhibit 3). 24

Additional Analysis

Analysis: IPO Turnover versus First Day Return

The analysis of first day return and stock turnover for a maximum of the first three days shows

the following. The higher the stock turnover, the higher is the gained return for early investors. A

high demand and supply for the offered stock increases its price and therefore the return for the

early investors. Over the last three decades there is also an increase of the stock turnover. In the

80’s, the average turnover was 17.6% while today’s turnover is over 60%. It signals that more

people are trading with IPO stocks in early stages (Exhibit 5). 25

Analysis: Short-term Return versus Long-term Return

After looking at this data, we can deduce that an short-term investor is statistically better off by

investing in a smaller company as the average first-day return for smaller companies is 23.3%

whereas the average buy and hold return for 3 years is only 5%. A long-term investor on the

24

Jay Ritters Hompage, IPO Data, IPOs 2011 Underpricing: http://bear.warrington.ufl.edu/ritter/IPOs2011Underpricing1912.pdf 25

Jay Ritters Hompage, IPO Data, IPOs 2011 Turnover Statistics: http://bear.warrington.ufl.edu/ritter/IPOs2011Turnover_04162012.pdf

14

other hand, should opt to invest in a bigger company as the long-term average 3 year buy and

hold return is 38.4% compared to an 11.9% average gain on the first day (Exhibit 6).26

Analysis: Various Sector Analysis

After analyzing the charts for each industry vertical separately we were able to dissect the

graphs of the total count of IPOs over time, the total transaction value of IPOs over time, as well

as the larger sized deals that lead the spikes in transaction volume. It is quite apparent that the

recession deeply affected worldwide IPOs in 2008-2009 with a huge effect on all the different

sectors. (Exhibit 7) Consumer Discretionary had a major increase in transaction value in the end

of 2010 due to General Motors Company’s 15.7 billion dollar IPO. (Exhibit 8) Consumer staples

were unique because of its strong spike in deal value during 2005-2006 because of Coca Cola’s

IPO worth 27.6 billion dollars. (Exhibit 9) Energy similarly had its strongest period both in terms

of deal count and value in 2006 due to the 10.4 billion dollar IPO of Rosneft Oil Company.

(Exhibit 10) The financial industry also peaked in both regards shortly afterwards in 2007.

(Exhibit 11) The healthcare industry reflects the overall trend of IPOs very closely but had a

strong spike in transaction values from 2010-2011 mainly caused by the combination of multi-

billion dollar IPOs of HCA Holdings and Otsuka Holdings. (Exhibit 12) The industrials sector’s

post recession levels seem to closely match the pre recession levels with a prominent deal value

spike in 2007 caused by a few billion dollar IPOs but mainly caused by China Railway Group

Limited’s 5.5 billion dollar IPO. (Exhibit 13) The Information Technology sector’s graph

matches the overall graph as well with distinguishing factors of large value spikes in 2007 and

2012. The 2007 spike was due to Visa, Inc.’s 17 billion dollar IPO and Alibaba.com’s IPO of 1.4

billion. The 2012 spike was famously caused by Facebook’s 16 billion dollar IPO. (Exhibit 14)

The Materials Sector had a major spike in 2011 caused by Glencore’s ten billion dollar IPO.

26

Jay Ritters Homepage, IPO Data, Long run Returns: http://bear.warrington.ufl.edu/ritter/IPOs2011Longrun4512.pdf

15

(Exhibit 15) Finally, in the telecom space the post recession period has not been able to come

close to the pre recession spikes in 2007, 2008, and 2009. The 2007 telecom spike was led by

Hrvatski Telekom’s 4 billion dollar IPO. The year 2008’s spike was led by the combination of

the 1.9 billion dollar IPO of Turk Telekomunikaasyon AS company and the 1.8 billion dollar IPO

of Mobile Telecommunications Company KSC. Finally, the IPO of Maxis Berhad worth 3.3

billion dollars caused the spike in deal value in 2009. (Exhibit 16)27

Conclusion

In this report we have analyzed the background to IPO’s and have explained how they are

brought to market. This often involves the use of multiple investment banks who act as

underwriters whereby they market the IPO and calculate the opening price of the stock. We then

looked at how the recession has affected the IPO market and found that the number of IPO’s per

year has decreased due to a combination of reduced investor confidence and poor market

conditions which would result in a lower market value. After this introduction to IPO’s we

examined the theory of underpricing where the underwriter favors institutional investors and/or

friends by quoting a low price that will rise sharply when the markets open. This is a

controversial practice as the underwriter should be looking to achieve the highest price possible

for the company. We compared two case studies, LinkedIn and Google. LinkedIn were the

victims of severe underpricing whereas Google decided to sell their IPO through a Dutch Auction

eliminating the middle man, the underwriter. Google is currently trading at a very high price

indicating that is has succeeded in its strategy to avoid underpricing. Finally we ran some

regression analyses in an attempt to compare different variable and look for correlations. These

27

CapitalIQ, IPO: https://www.capitaliq.com/CIQDotNet/Spotfire/Launch.aspx?SpotfireTemplateId=7&ActivityTypeId=3992&uniqueScreenId=186734129&screenOrder=2&fromScreenResults=1

16

included, Average First Day Return versus Number of Offerings, Number of Underwriters versus

Gross Spread , Aggregate Amount left on the Table versus Average First Day Return, and finally

IPO Turnover versus First Day Return. We found that that there is no statistically significant

correlation between the first day return and the number of offerings. Also that the correlation

between the number of underwriters and gross spread is slightly negative. The regression analysis

for the aggregate amount left on the table and the average first day return show a statistically

significant positive correlation. Our final regression model indicated that the higher the stock

turnover, the higher is the gained return for early investors.

“The authors of this paper hereby give permission to Professor Michael Goldstein to distribute

this paper by hard copy, to put it on reserve at Horn Library at Babson College, or to post a PDF

version of this paper on the internet”.

“I pledge my honor that I have neither received nor provided any unauthorized assistance during

the completion of this work.”

17

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12/02/2012.)

(Interview with L. Krigman)

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http://www.nytimes.com/2011/05/21/opinion/21nocera.html?ref=global. Last accessed

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or-shareholder-ripoff. Last accessed 12/02/2012.)

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29 Nov. 2012. <http://www.investopedia.com/terms/i/ipo.asp>.

"IPO Basics: Getting In On An IPO." Investopedia – Educating the World about Finance.

N.p., n.d. Web. 29 Nov. 2012. <http://www.investopedia.com/university/ipo/ipo1.asp>.

"IPO Advantages." Usequities.nyx.com. NYSE EURONEXT, n.d. Web. 30 Nov. 2012.

<http://usequities.nyx.com/listings/ipo-advantages>.

"State, Federal and Private Securities Laws." State, Federal and Private Securities Laws.

Lewis and Kappes, n.d. Web. 30 Nov. 2012. <http://www.lewis-

kappes.com/CM/FSDP/PracticeCenter/Securities/Securities--Business-

Focus.asp?focus=topic>.

Irons, John. "Economic Scarring: The Long-term Impacts of the Recession." Economic

Policy Institute. N.p., 30 Sept. 2009. Web. 30 Nov. 2012.

<http://www.epi.org/publication/bp243/>.

19

McClay, Rebecca L. "After Recession Lull, Local Companies Look toward IPOs." East

Valley Tribune. N.p., 13 Sept. 2010. Web. 30 Nov. 2012.

<http://www.eastvalleytribune.com/business/article_bd15db22-bd27-11df-bd19-

001cc4c002e0.html>.

"Stock FAQs: IPOs." IPO FAQ (Initial Public Offering). Fidelity Investments, n.d. Web.

30 Nov. 2012. <https://www.fidelity.com/stock-trading/faqs-ipos>.

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N.p., n.d. Web. 30 Nov. 2012. <http://books.google.com/books?id=Uil5fLFVl3IC>.

Capital IQ

Jay Ritters Homepage, IPO Data, Long run Returns:

http://bear.warrington.ufl.edu/ritter/IPOs2011Longrun4512.pdf

Jay Ritters Hompage, IPO Data, IPOs 2011 Turnover Statistics:

http://bear.warrington.ufl.edu/ritter/IPOs2011Turnover_04162012.pdf

Jay Ritters Hompage, IPO Data, IPOs 2011 Underpricing:

http://bear.warrington.ufl.edu/ritter/IPOs2011Underpricing1912.pdf

20

Exhibit 1: Regression Analysis: Average First Day Return versus Number of Offerings

The regression equation is

Average First Day Returns (%) = 10.4 + 0.00894 Number of Offerings

Predictor Coef SE Coef T P

Constant 10.385 2.697 3.85 0.000

Number of Offerings 0.008936 0.006651 1.34 0.185

S = 14.6434 R-Sq = 3.5% R-Sq(adj) = 1.6%

Analysis of Variance

Source DF SS MS F P

Regression 1 387.0 387.0 1.80 0.185

Residual Error 50 10721.5 214.4

Total 51 11108.5

21

Unusual Observations

Average

First Day

Number of Returns

Obs Offerings (%) Fit SE Fit Residual St Resid

9 368 55.90 13.67 2.14 42.23 2.91R

10 1969 12.50 27.98 11.50 -15.48 -1.71 X

14 105 -17.80 11.32 2.30 -29.12 -2.01R

40 486 69.70 14.73 2.50 54.97 3.81R

41 381 56.30 13.79 2.17 42.51 2.94R

R denotes an observation with a large standardized residual.

X denotes an observation whose X value gives it large leverage.

22

Exhibit 2: Regression Analysis: Number of Underwriters versus Gross Spread

The regression equation is

number of underwriters = 27.8 - 344 Gross spread

Predictor Coef SE Coef T P

Constant 27.779 2.330 11.92 0.000

Gross spread -343.83 32.54 -10.57 0.000

S = 0.868181 R-Sq = 78.8% R-Sq(adj) = 78.1%

Analysis of Variance

Source DF SS MS F P

Regression 1 84.167 84.167 111.67 0.000

Residual Error 30 22.612 0.754

Total 31 106.779

23

Exhibit 3: Regression Analysis: Aggregate Amount left on the Table versus Average First Day

Return

The regression equation is

Aggregate amount left on the ta = - 3.20 + 0.502 Average First Day Returns (%)

Predictor Coef SE Coef T P

Constant -3.1955 0.5333 -5.99 0.000

Average First Day Returns (%) 0.50224 0.02751 18.26 0.000

S = 2.08196 R-Sq = 91.7% R-Sq(adj) = 91.5%

Analysis of Variance

Source DF SS MS F P

Regression 1 1444.9 1444.9 333.34 0.000

Residual Error 30 130.0 4.3

Total 31 1574.9

24

Unusual Observations

Average

First Day Aggregate

Returns amount left

Obs (%) on the ta Fit SE Fit Residual St Resid

20 69.7 36.940 31.811 1.575 5.129 3.77RX

21 56.3 20.690 25.081 1.220 -4.391 -2.60RX

29 6.4 5.650 0.019 0.424 5.631 2.76R

R denotes an observation with a large standardized residual.

X denotes an observation whose X value gives it large leverage.

25

Exhibit 4: IPO Data

Year

Number of

Offerings

Average First

Day Returns (%) Gross spread

Number of

underwriters

Aggregate

amount left on

the table (in

billion)

1960 269 17.8

1961 435 34.1

1962 298 -1.6

1963 83 3.9

1964 97 5.3

1965 146 12.7

1966 85 7.1

1967 100 37.7

1968 368 55.9

1969 1969 12.5

1970 780 -0.7

1971 358 21.2

1972 562 7.5

1973 105 -17.8

1974 9 -7

1975 12 -0.2

1976 26 1.9

1977 15 3.6

1978 19 12.6

1979 39 8.5

1980 75 13.9 8.1% 1.4 0.18$

1981 197 6.2 7.9% 1.3 0.14$

1982 81 10.7 8.1% 1.4 0.13$

1983 522 9 7.7% 1.5 0.84$

1984 222 2.5 7.9% 1.5 0.04$

1985 214 6.2 7.7% 1.5 0.22$

1986 479 6 7.5% 1.6 0.68$

1987 336 5.7 7.5% 1.8 0.66$

1988 130 5.4 7.3% 1.7 0.13$

1989 121 7.9 7.3% 1.7 0.24$

1990 115 10.5 7.3% 1.9 0.34$

1991 295 11.7 7.1% 2 1.50$

1992 416 10.2 7.2% 2.1 1.82$

1993 527 12.7 7.2% 2.1 3.52$

1994 411 9.8 7.3% 2 1.46$

1995 460 21.1 7.2% 2.3 4.41$

1996 688 17.2 7.2% 2.4 6.80$

1997 485 14 7.2% 2.5 4.54$

1998 318 20.2 7.1% 2.9 5.25$

1999 486 69.7 6.9% 3.4 36.94$

2000 381 56.3 6.9% 3.7 20.69$

2001 79 14.2 6.6% 4.4 2.97$

2002 70 8.6 6.7% 4.7 1.13$

2003 67 12.3 6.9% 4 1.00$

2004 184 12.2 6.8% 4.5 3.87$

2005 168 10.1 6.7% 4.7 2.64$

2006 162 11.9 6.8% 4.9 3.95$

2007 162 13.8 6.7% 5.3 4.95$

2008 21 6.4 6.4% 7.3 5.65$

2009 43 10.6 6.4% 6.9 1.46$

2010 103 8.8 6.7% 6.1 1.87$

2011 82 13.2 6.4% 7.1 3.23$

26 | P a g e

Exhibit 5: Return versus Turnover

Return

Categories 1983-1989 1990-1998 1999-2000 2001-2011

return <0% 14.80% 24.40% 51.90% 51.50%

0% < return <

10% 18% 27.60% 52.70% 49.70%

10% < return

<60% 21.60% 43.80% 69.90% 71.70%

return > 60% 26.20% 77% 101% 131.60%

Exhibit 6: Short-term Return versus Long-term Return

Sales Average first-day return Average 3-Year Return

0-9.9b 24.40% -10.80%

10-19.9b 26.40% 5.20%

20-49.9b 20.70% 21.30%

50-99.9b 15.20% 38.40%

100-499.9b 10.70% 39.20%

500b and up 9.10% 36.70%

0-49.9b 23.30% 5%

50b and up 11.90% 38.40%

1980-2010 18% 20.80%

27

Exhibit 7: All Sectors Numbers and Value of IPOs

28

Exhibit 8: Consumer Discretionary

29

Exhibit 9: Consumer Staples

30

Exhibit 10: Energy

31

Exhibit 11: Financials

32

Exhibit 12: Healthcare

33

Exhibit 13: Industrials

34

Exhibit 14: Information Technology

35

Exhibit 15: Materials

36

Exhibit 16: Telecommunication Services