1. INTRODUCTION
1.1 RESEARCH PURPOSE AND MOTIVATION
1.1 RESEARCH PURPOSE AND MOTIVATION
Corporations may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offerings (IPOs) is the selling of securities to the public in the primary market. The main initial public offerings (IPOs) method are book-building, auction method, and public offer. Most companies in Taiwan securities market are using the combination way of book-building and public offer. The book-building method also has the advantage of reducing the degree of underpricing.
In general, the book-building method is essentially a process used by companies raising capital through Public Offerings, both Initial Public Offers (IPOs) or Follow-on Public Offers (FPOs) to bid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price range specified by the issuer and underwriter.
The process is directed towards both the institutional as well as the retail investors. The offer price is determined after the bid closure based on the demand generated in the process. Book-building models beginning with Benvensite and Spindt (1989) and Benveniste and Wilhelm (1990) argue that the underwriter’s control of both price and allocations may be used to induce investors to reveal their private information. These explanations focus on asymmetric information and the difficulties with establishing a right price value for new shares.
However, the book-building bids and allocation data are not publicly accessible.
It is difficult for us to observe how the final shares are allocated, although we know the underwriter have the preference for specific informed investors. Hence, it is difficult to research on the implications of book-building model. Accordingly, we try to use the information flows as the key factor to observe this pricing process.
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information opaqueness as pointed out by Morck, Yeung, and Yu (2000), stock prices in these markets are quite sensitive to political events and rumors. Furthermore, domestic individual investors are the main group in the Taiwan market in that they dominate majority of total security trading, but they rely on noise in the market.Consistent with recent studies, IPO firms tend to show themselves as those with good prospects. These issuers also intend to make use of every opportunity to maximize their own personal wealth. Arbel and Strebel (1983) suggest that individual investors are usually uninformed, poorly trained, and inclined to rely on noise in the market.
Especially, unlike the regulatory environment of equity offering in the United States, there is no restriction on news announcements of issuers around IPOs in Taiwan. It also allows IPO firms to release news that can generate favorable views at their discretion.
For instance, a firm can announce its potential operation and business strategies via news. These news shows that the firms have an attempt to present their positive image and attract investors. Therefore, examining financial news of IPO firms in Taiwan allows us to investigate whether the investors are influenced the sentiment of the media.
News carries information about the firm’s fundamentals and qualitative information influencing expectation of market participants. The news media de facto influences stock prices to some extent. There is also evidence that investors are not only subject to the sentiment of related news but also public opinions. Comparing to forecasted earnings disclosed by IPO firms, news regarding these firms announced through media are more qualitative in nature.
In this thesis, we focus on the media attention before the IPO day. By going through the book-building process, issuers are attempting to attract the investors’
attention. Also, underpricing may be a way to induce the investors to know this particular company, and pay attention on the initial public offerings. We focus on
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examining the relationship between media coverage and underpricing. In the past researches, we find that the relationship between media coverage and price revision is consistent with the information production theory. Liu, Sherman and Zhang (2009) indicate that book-building model predict that underpricing will be concentrated in high demand offering, in order to make it easier to induce truthful revelation of investors’
private information even when that information will be used to raise the offer price for high demand offerings. Before discussing the relation between the media coverage and underpricing, they define investors’ demand is quiet relatively to the offer price. With the revelation of private information, when the investors’ demand is high, the offer price is revised upwards from the midpoint of the initial filing range. Whereas, when demand is low, the offer price is revised downwards. Price revision will be used as an important control variable mentioned in section 3.4.
This thesis is closely related to Liu et.al (2009), which established that more pre-IPO media coverage is strongly related to the liquidity. Liu et al. (2009) propose that the media coverage as a proxy for the investors’ attention. They count the number of articles from these media sources covering the IPO companies during the window.
Since the length of the window varies across firm, they standardize the media coverage measure into a per month basis and use it in their empirical analyses. The big difference between this thesis and the research of Liu et.al (2009) is that Liu et.al (2009) do not attempt to categorize the news announcement as “positive” or “negative”. This study investigates whether the sentiment of media is responsible for the phenomenal rise and fall in the market value. Furthermore, we look at both the number of the news announcements and their sentiment type.
This study motivated by the recent literature that investigates the role of investor sentiment (Neal and Wheatley 1998 and Baker and Wurgler 2003). We focus on whether the IPO firms can engage in other qualitative types of reporting to influence
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investors’ perception, and their demand for the new issue shares. In order to test this question, this study collects the news items from the largest internet news database and categorize them (positive, negative, or neutral). Although the textual information is an important component of the news. In our sample, the news covers a wide of topic, such as the company’s recent financial performance, business strategies, strategic alliances, competitive position within the industry, and so on, this study does not focus on what type of the news have the relation with underpricing. On the other hand, there is a key characteristic of the news is the effect of the sentiment polarity in news that we focus on.
To avoid the subjective judgment bias, we use sentiment dictionary-based approach to convert the qualitative news into quantitative measures. Azar (2009) argue that through the sentiment analysis process, information is converted from a textual form to a numeric form. To convert the text information is a useful way because it allows information to be easily summarized and compared.
In summary, using this sentiment approach to measure whether the media coverage is related to underpricing or not help us to know the positive or negative information affect the offer price, also help us to know the investor sentiment for the IPO firms.