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French IPO returns and subsequent security offerings:Signaling hypothesis versus market feedback hypothesis

Author

Listed:
  • Edith Ginglinger

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Anne-Marie Faugeron-Crouzet
  • Vasumathi Vijayraghavan
Abstract
In this article, we look at two competing hypotheses to explain IPO underpricing in France when a seasoned offering follows the IPO. The first hypothesis assumes that the initial underpricing is a signal from a high quality firm in the anticipation of a subsequent equity issue at a higher price. The second competing hypothesis assumes that the market transmits to managers their valuation of the company. Our database examines two types of subsequent risky issuances: on the one hand, stocks and on the other hand, hybrid issuances (such as convertible bonds, bonds with attached warrants, and stocks with attached warrants). Further, in the French market, firms may be introduced through different mechanisms, which are not equally compatible with both hypotheses. We show that the initial underpricing is greater if a stock issuance rather than other security offerings of a convertible nature subsequently follow the IPO. We find evidence in favor of the signaling hypothesis in the case of fixed price IPOs. For the auction-like procedures, we show that the initial investors' demand, rather than post-IPO performance, determines the type of security that is issued, but has no effect on the financing decision itself. The market feedback hypothesis is therefore only weakly supported: a poor market message does not keep managers from expanding, but rather encourages them to use stage financing rather than straight equity.

Suggested Citation

  • Edith Ginglinger & Anne-Marie Faugeron-Crouzet & Vasumathi Vijayraghavan, 2003. "French IPO returns and subsequent security offerings:Signaling hypothesis versus market feedback hypothesis," Working Papers halshs-00165026, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00165026
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00165026
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    Citations

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    Cited by:

    1. Stolpe, Michael, 2003. "Learning and signalling in the French and German venture capital industries," Kiel Working Papers 1156, Kiel Institute for the World Economy (IfW Kiel).
    2. Schuster, Josef Anton, 2003. "IPOs: insights from seven European countries," LSE Research Online Documents on Economics 24860, London School of Economics and Political Science, LSE Library.
    3. Dorsaf Ben Aissia & Narjess Skhiri Hellara, 2019. "Systematic risk, the tradeoff of leverage and IPO first-day returns," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 239-256, July.
    4. Stolpe, Michael, 2004. "Europe's entry into the venture capital business: efficiency and policy," Kiel Working Papers 1223, Kiel Institute for the World Economy (IfW Kiel).
    5. Aissia, Dorsaf Ben, 2014. "IPO first-day returns: Skewness preference, investor sentiment and uncertainty underlying factors," Review of Financial Economics, Elsevier, vol. 23(3), pages 148-154.

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