Tie-in%20agreements%20and%20first-day%20trading%20in%20initial%20public%20offerings

1
Tie-in agreements and first-day trading in
initial public offerings

• Hsuan-Chi Chen, Robin K. Chou, and Grace C.H.
  Kuan
• 2006 NTUConference
• Discussed by Yanzhi Wang

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Summary

• This paper examines the underpricing during
  internet bubble by laddering. They firstly
  compute the laddering likelihood that is
  interpreted by matched industrial sector and
  pretax income. Then, they find that laddering
  likelihood is positively related to the magnitude
  of underpricing, number of trading and order
  imbalance.
• Different from previous IPO papers accounting for
  the IPO underpricing during internet bubble
  period (e.g, Loughran and Ritter (2002)), they
  provide an alternative point of view to interpret
  this puzzle.

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Comments- the probit model

• This paper mentions that the loose listing
  standards in Nasdaq give access for unprofitable
  firms to go public during the internet bubble
  period. Based on the rule, they suggest the
  unprofitable firms being easier to be the
  laddering manipulation targets. So, the authors
  might consider to put the dummy whether a firm is
  traded in Nasdaq in the probit model. Probably it
  may match the argument in the paper more.

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Comments- ex post or ex ante

• The authors suggest the laddering to be positive
  associated with the underpricing. Im thinking
  the ex post and ex ante aspects in this issue.
  Lets consider the following case
• Realized laddering
• Predicted laddering by P(y1)gt0.5 or P(y1)gt of
  ture laddering

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Comments- ex post or ex ante
Laddering No laddering
Predicted laddering Higher underpricing here?
Predicted not to laddering Or higher underpricing here?

• The predicted side is the ex ante point of view,
  that is IPOs that are more likely to be laddering
  targets generate more interests and net buying.
• The actual laddering is the ex post point of
  view, which says that first-day price increases
  just in terms of the over-allotment.

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Comments- prospect theory

• Loughran and Ritter (2002) explain the
  underpricing during internet bubble by prospect
  theory, i.e., the more share held by managers,
  the more underpricing the IPO has. Hence, the
  authors may consider this factor into the
  regression analyses. For example, put the
  ownership of the insiders into the regression. In
  my opinion, it may strengthen the result in this
  paper.