Question

Part A) Which is NOT an IPO puzzle?

1. Huge price spikes in the first couple trading days
2. Underperformance in the long run
3. Extreme IPO market cycles
4. Hiring underwriters to do the job

Part B) Which is NOT an SEO puzzle?

1. Negative market reaction on average upon SEO announcements
2. Long-run underperformance
3. Very costly to hire underwriters
4. Extreme SEO market cycles

Answer 1

Part A - The answer is b.

The firms surviving the long-run post their IPOs have higher return than normal market returns. For example, a research paper published by 'Jay R. Ritter' from University of Florida the higer returns of IPOs in the long-run vis-a-vis the market returns. The paper studies the performance of long-run returns on IPOs from 1980 through 2014.

All the other options are correct:

a) In the first couple of days of an IPO, the price rises due to profit-booking by some of the investors.

c) The IPOs depend on overall equity capital markets and the marcro conditions. If the economy is in the expansionary phase, asset prices are expcted to be higher and issuing an IPO in such a scenario would yield better results and vice-versa.

d) Underwriters (the Investment Bankers) help organizations undertake the IPOs wherein they help them with correctly assessing the values of shares, and carry out other legal, regulatory aspects.

Part B - The answer is c.

There are no evidences to show that it is costly to hire underwriters for Secondary Equity Offerings (SEO) or Seasones Equity Offering. In SEO, an exisiting public company releases additional shares. It may be non-dilutive or dilutive or both.

In fact, the study of SEOs from 1996-2001, by Drucker and Puri (2005) shows that the issuer of an SEO benefits through lower financing costs and through lower underwriting fees.

The other options are correct.