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立 政 治 大 學
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1. INTRODUCTION
1.1 Research Purpose and Motivation
Underpricing of initial public offerings is proved to be prevalent in many countries’ stock market. In the past, a great amount of theoretical literature analyzes what reasons lead to underpricing of initial public offerings. One of the previous theories is based on asymmetric information.
The first and best known study of asymmetric information about IPO underpricing is modeled by Rock (1986) and addresses “winner’s curse” that IPO underpricing is a consequence of rational behavior by issuing firms in an environment characterized by information asymmetry between different investors (Givoly and Shi 2008). In order to attract uninformed investors, issuers have to compensate uninformed investors for the risk of subscribing the shares of inferior offerings. Afterward Beatty and Ritter (1986) quote Rock’s theory and introduce ex ante uncertainty to measure the degree of asymmetric information. They predict that there is a positive association between the ex ante uncertainty about the value of an initial public offering and its expected initial return.
Subsequently, there is a great deal of literature that uses different measurement as a proxy for ex ante uncertainty including the information disclosed in the prospectus. Disclosure of use-of-proceeds or risk factors in the prospectus is regarded as a proxy for ex-ante uncertainty. Beatty and Ritter (1986) finds that issues for which there is greater ex ante uncertainty tend to have greater the number of use-of-proceeds listed. And the result corroborates the proposition that the greater is the ex ante uncertainty about the value of an issue, the greater is the expected underpricing. Beatty and Welch (1996) indicates that firms citing more risk factors must increase IPO underpricing. More recently, Hanley and Hoberg (2008) use word
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立 政 治 大 學
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content analysis to make a study of the relation between disclosures in the prospectus and initial returns. Arnold, Fishe, and North (2010) also find that ambiguous information in the risk factors section is positively related to underpricing.
According to previous research, this study regards disclosure of risk factors as a proxy for ex-ante uncertainty to analyze its relation to IPO underpricing. In order to measure risk factors in the prospectus, two approaches are applied. The first approach that counting the number of captioned risks in the risk factors section is similar with past study. In addition to the quantity of disclosure, this study also focuses on the content and description of risk factors which is coded on the basis of four-class index to be disclosure score under the second approach. Therefore, this study examines the association between disclosure of risk factors and underpricing by the number of risk factors and disclosure score separately. Moreover, because there may be greater losses that large companies can bring about from facing risks, investors will pay more attention to the information disclosed in the prospectus. This study will think over the effect of firm size on the relation between disclosure of risk factors and underpricing.
Furthermore, this study focuses on the biotech companies in the U.S IPO market because industrial characteristics of the biotech industry will affect investor’s evaluation of the company value and ex ante uncertainty of issues. Recently many scholars begin to explore the valuation of biotech IPOs or information disclosed in the biotech industry. They think the biotech industry is growing fast and its products under development are novel. Thus, there is the large information asymmetry between managers and investors and it is difficult for investors to evaluate the value of the biotech firms. However, much prior literature indicates that one way that biotech companies have tried to moderate investors’ concern is to ally with major
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立 政 治 大 學
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N a tio na
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pharmaceutical and health care companies which have prominent marketing and sales expertise as well as financial capital that can support the biotech firms through product development process (Guo, Lev, and Zhou 2004). Stuart, Hoang, and Hybels (1999) indicates that if young firms in the biotech industry tie to major pharmaceutical and health care companies, it can signal a firm’s quality to key external resource holders, which affects IPO performance. Besides, Jensen (2004) also argues that a firm’s alliance activity provides valuable market signals because alliances are widely observable and reflect the extent to which a firm’s resources and capabilities are in demand by other organizations. According to previous research, this study thinks that strategy alliance conveys a positive signal to investors. It means firms with strategic alliances will be less risky and less uncertainty. Consequently, this study also discusses the impact of strategic alliances on the association with underpricing and predicts that a biotech firm with strategic alliances before IPO date will experience lower underpricing.
Based on above discussion, this study analyzes biotech firms of IPOs in America during 1997-2012 and considers the impact of strategic alliances during 1990-2012 to examine the effect of disclosure of risk factors and strategic alliances on underpricing.
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立 政 治 大 學
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1.2 Research Questions
According to the research purpose and motivation, the research questions of this study are as follows:
1. How does disclosure of risk factors impact on underpricing?
2. How is disclosure of risk factors associated with underpricing under different firm size?
3. How is the effect of strategic alliances before IPO date associated with underpricing?
The remainder of this paper is organized as follows. Section 2 presents relevant literatures. Research methodology is described in Section 3. In Section 4, the study presents the empirical results. Finally, conclusion is provided in Section 5.
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1.3 Research Structure
The research structure in this study is presented as follows:
Figure 1-1. Research Structure
Introduction
Literature Review
Research Methodology
Empirical Results and Analysis
Conclusions
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