How well did the stock market treat industry? : evidence from initial public offerings on the London Stock Exchange over the twentieth century
The IPO market provides owners of firms and entrepreneurs with an exit for their equity investments and the opportunity to raise new capital. One empirical measure of how good a job the stock market has done for issuing firms over time is IPO underpricing. Yet, nothing is known about underpricing in Britain, nor, with one exception, about underpricing anywhere else before 1959. This thesis presents a new long-run IPO data set and analyses the change in underpricing over time. Contrary to my prior expectation and despite improvements in the regulation, disclosure, investor protection and underwriting of IPOs, underpricing rises in the second half of the century compared to the interwar years. This rise cannot be explained by any composition effect in the IPO sample or change in issue method. Plausible explanations for this puzzle include the rise of issuing house monopsonistic power, provincial competition, the exacerbation of a winner's curse and the resort to underpricing as an anti-takeover strategy in the second half of the last century. The thesis looks at the first of these possibilities and concludes that whilst reputable issuing houses appeared to neither lower nor exacerbate underpricing, they collectively failed to recommend the highly effective method of the tender offer to their corporate clients. The remaining hypotheses are to be researched in post-doctoral work. The thesis also examines how IPO underpricing and survival behaved during the two episodes of investor exuberance about technology stocks in Britain in the last century, the 1920s and 1990s. The jump in underpricing of "technology" IPOs in 1928-29 was as nothing to that witnessed in 1999-2000. On the other hand, survival of the 1999-2000 IPOs was much improved compared to the earlier period. Whilst the underpricing findings suggest that industry was not at all badly treated by the London stock market in the interwar years and was leaving small amounts of "money on the table" compared to thereafter, the survival evidence indicates the opposite to be true. A market such as that in 1928-29 where IPOs had less than a 50% chance of surviving to their fifth birthday as a quoted company was unacceptable.