IPO Underpricing in Germany - Empirical Analysis of Influencing Variables

Table of Content

List of Figures

List of Tables

List of Appendices

List of Abbreviations

List of Symbols

1 Introduction

2 Theoretical Aspects of an IPO
2.1 Definition of an IPO
2.2 The IPO Price Setting Process
2.2.1 Business Valuation
2.2.2 Share Pricing
2.3 The Special Role of the Underwriter in the IPO Process

3 IPO Underpricing
3.1 Definition of IPO Underpricing and Empirical Evidence
3.2 The Winner’s Curse Hypothesis
3.3 Market Feedback Hypothesis
3.4 Bandwagon Hypothesis
3.5 Lawsuit Avoidance
3.6 Signalling
3.7 Investment Banker’s Monopsony Power
3.8 Principal Agent Problem
3.9 Prospect Theory
3.10 Anchoring

4 Long-Run Performance and Overvaluation of IPOs
4.1 Evidence on Initial Investor Overoptimism
4.2 Reasons for Initial Overvaluation
4.2.1 Overreaction Hypothesis
4.2.2 Representativeness Heuristic
4.2.3 Divergence of Opinion Hypothesis
4.2.4 Big Winner Hypothesis
4.2.5 Underwriter Conflict of Interest
4.2.6 Window-Dressing

5 Empirical Analysis of Underpricing in Germany
5.1 Development of Explanatory Variables
5.1.1 Management Ownership
5.1.2 Pre-Market Demand
5.1.3 Recent Market Movements
5.1.4 Underwriter Reputation
5.1.5 Industry, Company Age and Firm Size
5.2 Theoretical Model and Statistical Method
5.3 Data and Descriptive Statistics
5.4 Results and Interpretation
5.4.1 Management Ownership
5.4.2 Pre-Market Demand
5.4.3 Recent Market Movements
5.4.4 Underwriter Reputation
5.4.5 Industry, Company Age and Firm Size

6 Conclusion

Bibliography

List of Online Sources and Software

Appendix

List of Figures

Figure 1 Discounted Cash Flow Methods

Figure 2 Parties Involved in IPO and Equity Offerings

Figure 3 IPO Underpricing Across Countries

Figure 4 IPO Underpricing versus Overvaluation

List of Tables

Table 1 Descriptive Statistics

Table 2 OLS Estimation Results

Table 3 OLS Estimation for Breusch-Pagan Test

Table 4 OLS Estimation for White-Test

Table 5 Variance Inflation Factors (VIF)

List of Appendices

Appendix A Calculation Breusch-Pagan Test

Appendix B Calculation White-Test

Appendix C Variance Inflation Factors (VIF)

List of Abbreviations

illustration not visible in this excerpt

List of Symbols

illustration not visible in this excerpt

1 Introduction

Detected on the US market centuries ago, underpricing is the phenomenon of abnormal first-day returns from initial public offerings (IPOs). Without doubt, any US investor would agree, that one day-returns of 11.4% on average are exceptional and a worthwhile investment. Since then many studies have proven that it is a persistent phenomenon and also occurs on markets all over the world.

The most puzzling question for scientists is why companies are leaving this money on the table and don’t set an offering price that reflects the market demand at the offering date. Within that, researchers have also been trying to determine the factors that influence the severity of underpricing. Many different explanations with regard to the existence of underpricing have been derived thus far, with all claiming to be valid even if not exclusively. But despite this effort, research so far has not been able to create common sense. Some even argue that underpricing may not exist at all since most IPOs underperform severely in the long-run which leads some people to the conclusion that IPOs are in fact overpriced.

The main focus of this paper is whether and how the findings of past research, primarily conducted for the US market, apply to the German IPO market. As a result, both investors and issuers shall receive practical implications for their decision-making within the IPO process.

So far, profound underpricing research for the German market has been rather scarce. Most of the available literature concentrates either on dates before 1997 (SCHMIDT et al., 1988; LJUNG-QVIST, 1997) when most offering prices have been determined by using the fixed price mechanism whereas the most recent studies focus on the German stock exchange segment “Neuer Markt” exclusively (LUBIG, 2004; HUNGER, 2001; TIETZE, 2005).

In contrast, this paper aims to give a more recent analysis of underpricing on the German market without distinguishing between different market segments. Additionally, a broad over-view and understanding of IPO underpricing, taking the long-run performance of IPOs into account, will be included.

As a result, this paper is structured as follows: The second section consists of a description of some of the important theoretical aspects that have influence on the price setting of an IPO. It will concentrate on business valuation as it is the basis for setting the price of an IPO. Furthermore, the most common price setting mechanisms shall be explained. Additionally, the special role of the lead underwriter in the IPO process will be outlined as it may also play a role in IPO underpricing. The third section depicts past research results with regard to IPO underpricing and sums up theories for why underpricing exists. Section four focuses on the long-run performance of IPOs and deals especially with the question of whether IPOs are systematically overvalued by investors and why. The empirical analysis is contained in section five. Firstly, the influencing variables of underpricing and the applying theoretical model will be derived. Subsequently follows the presentation and interpretation of the results, as well as the im-plications for both issuers and investors. Section six summarizes the results from this paper and provides an overall conclusion.

2 Theoretical Aspects of an IPO

2.1 Definition of an IPO

Among others, Fuller and Farrell (1987, p. 18) give a definition of IPOs. According to them, initial public offerings “[…] are involved with unseasoned issues – that is, the securities are being offered to the public for the first time and, thus, there is no established market price for them.” By their definition, an IPO is not narrowed down to equity issues only, but may also include the issuance of debt. However, throughout this thesis, when using the term IPO, the issuance of equity is meant, as it has its own specific characteristics.

2.2 The IPO Price Setting Process

The determination of the offer price is only part of an extensive IPO process and can be split into two phases. Firstly, the issuer and its advisors need to determine the company value. This is the basis for the second phase, where the final offer price needs to be set. Thus, the two common business valuation methods in IPOs as well as the price setting mechanisms are explained in the remainder of this section.

2.2.1 Business Valuation

One of the most important phases of an IPO is the determination of a business value. It is the basis for an offering price of the shares to be placed that needs to be accepted by the capital market. When it comes to the valuation of a business, the Relative Valuation method and the Discounted Cash Flow (DCF) approach have achieved most international acceptance in IPO practice (WIESMANN et al., 2001, p. 50) and thus will be explained here.

2.2.1.1 Relative Valuation

The main question with regard to this valuation method is, what the value of the company is based on the value of similar publicly traded companies, thus aiming to obtain a market value of the company (GEDDES, 2003, p. 77). Its underlying assumption is that similar companies must have a similar company value.

The market value of companies that are not publicly traded is usually derived from the comparison of ratios of as many as possible comparable companies. These companies are either publicly traded or have changed owner recently and where the purchase price is known. However, this comparison needs to be adjusted for the specifics of the company to be valued (BORN, 2003, p. 15). The applied ratios can refer to different benchmarks, especially depending on the sector. Most commonly used are profit, cash flow and revenue ratios (MANDL & RABEL 1997, p. 45). Then, the corresponding value of the company, i.e. the EBIT, needs to be put into relation with the corresponding value of the peer company and its company value.

Balz (2001, p. 71 et seq.) summarizes the main advantages and disadvantages of this method of which some shall be discussed here. The Relative Valuation method has two important advan-tages: First, the complexity of the valuation is reduced and thus first results can be achieved very quickly. Furthermore, this method is broadly accepted by market participants.

However, the disadvantages should not be underestimated. Relative Valuation can easily be manipulated i.e. by the choice of the appropriate peer-group and the correction for extreme values. Depending on the number of and which peers are chosen, the resulting company value can differ extremely. For some sectors, especially “new” industries, it may be hard to find comparable companies at all.

Furthermore, Relative Valuation methods often follow an experience driven approach without underlying valuation theory. The problem is that a time stable correlation between multiple and business value is especially for “new” industries not yet given. This is especially the case when the market temporarily over- or undervalues^[1] certain industries. Thus, it is questionable whether the estimated business value was still representative at the timing of the valuation. And especially with regard to IPOs, these “new” industries are usually overrepresented in IPOs. It should also be added that there is always an issue of how old the market data used is. As a result, the issuer does not know for sure, whether his or her estimated business value will be accepted by the capital market.

2.2.1.2 Discounted Cash Flow

The question behind the Discounted Cash Flow (DCF) approach is what the company’s intrinsic value is (GEDDES, 2003, p. 77). Further, the intrinsic value is defined as the present value of future cash flows (BODIE et al., 2003, p. 259) and is also referred to as the fair value. There are several different approaches to determine the business value according to the DCF method (see figure 1) but which theoretically all lead to the same business value. Due to its popularity in practice, the weighted average cost of capital (wacc) approach shall be explained in more detail in the remainder of this section.

illustration not visible in this excerpt

Figure 1 Discounted Cash Flow Methods

Applying the wacc approach, the expected cash flows available for both investors and debitors of the company are discounted at a rate that reflects the riskiness of the cash flow, which is the wacc. In a second step, the value of the debt needs to be deducted resulting in the equity value which is the company value (COPELAND et al., 2000, p. 63). The business value is formally derived (BALLWIESER, 1998, p. 84):

illustration not visible in this excerpt

Where,

BV = Business Value

E = Equity

TA = Total Assets

D = Debt

CF = Cash Flows available for investors

and debitors

wacc = Weighted average cost of capital

The wacc is the cost of capital to be paid to debitors plus the return expectations of the owners weighted by their proportion in the total company value (BEHRINGER, 2004, p. 101). When determining the cost of capital, market values instead of book values need to be used (COPELAND et al., 2000, p. 202). The fact that the company value rises due to the deductibility of the debt capital from the taxable base is displayed in the tax shield.

From that, the wacc are formally defined as (MANDL & RABEL, 1997, p. 39):

illustration not visible in this excerpt

The cost of capital for equity holders is in practice often calculated applying the Capital Asset Pricing Model (CAPM). According to this model, the return on equity depends on the risk-free rate of return, the market return and the company specific risk which is expressed as the stocks’ sensitivity in relation to market movements. The CAPM is formally stated as (BALLWIESER, 1998, p. 82):

illustration not visible in this excerpt

The β-factor as a measure of a stocks’ sensitivity to market movements is calculated (PERRIDON & STEINER, 1997, p. 264):

illustration not visible in this excerpt

According to this formula, a β-factor of one means that the return of the security fluctuates with the same intensity as the return of the market. A β-factor of 1.5 means that the security fluctuates by 1.5 when the return of the market changes by one and thus indicates a higher risk for the single security compared to the market. Vice versa, when the β-factor is lower than one it indicates a lower risk of the security compared to the market.

The DCF method is a theoretically profound approach to calculate a companies‘ intrinsic value. However, as well as the Relative Valuation method, it has certain drawbacks that become apparent in implementation. For companies that are not yet listed on the capital market, as is the case for IPOs, a peer group needs to be derived in order to be able to determine an approximate β-factor. This underlies the same problems as with the Relative Valuation method.

Another big challenge to implement the DCF approach is to derive the appropriate input factors. How can the cash flows for an indefinite period of time be predicted when they depend on a multitude of factors and unknown events that arise in the future? What is the appropriate risk-free rate of return? What is the correct market rate of return? How can the use of a historical β-factor be justified for future predictions?

In practice, as an answer to most of these questions, certain approximation procedures have been established to match the underlying theory as close as possible. However, since these procedures still vary, and also the underlying assumptions and opinions, so will the estimated company value by investors, issuers or underwriters.

For IPOs this means that the issuer, respectively the underwriter, receives only an approximate company value with its valuation. But it does not mean that this valuation reflects the expectations of the capital market and will be accepted by the same.

2.2.2 Share Pricing

After the company value has been estimated by the issuer and its advisors (see sec. 2.2.1) and after at least some of the marketing, a definite offering price needs to be set. The three main mechanisms are book-building, auction and fixed-price offerings. These mechanisms allow the underwriter to different degrees to cross-check the estimated company value with the capital market before the IPO. It is reasonable to assume that the issuer will be then able to set a final offer price that matches the market demand most, the more knowledge he or she is able to obtain about it. In the following, the operating principles of all mechanisms shall be outlined briefly.

2.2.2.1 Fixed Price

With the fixed price mechanism, the final offer price is set before investors are asked to hand in their purchasing orders. Instead, the offer price is included in the preliminary prospectus and is determined anywhere from two weeks to two month before the offer date. The underwriter also does not actively sell the fixed-price IPOs. He rather distributes the prospectus to potential investors, collects order applications and allocates the shares (DRAHO, 2004, p.217 et seq.).

This mechanism gives issuer and underwriter no opportunity to check whether the estimated company value will be accepted by the capital market. Thus, it can be assumed that it is the most risky in terms of the successful placement of all shares to be issued.

2.2.2.2 Auctions

The auction mechanism gives the issuer and underwriter the least amount of control with regard to the outcome of the IPO. It works as follows: Investors submit their orders specifying the number of shares and the limit price at which they will buy. All the individual orders are then aggregated into a cumulative demand curve and the offer price is determined by the intersection of the demand curve and the fixed supply. Every investor who has submitted a bid above the offer price gets his or her order filled (DRAHO, 2004, p. 218 et seq.). In that case, all shares will be distributed with the highest probability. But in turn, the underwriter has no control over the final offer price.

2.2.2.3 Bookbuilding

At the beginning of the bookbuilding process, an expected offer price and a preliminary offer price range needs to be set as well as published and distributed in the preliminary prospectus. Subsequently follows a ‘road show’ where the issuer’s executives and the underwriter promote the IPO by traveling around the country and meeting potential investors. The road show enables the underwriter to learn about investor demand through indications of interest. (GEDDES, 2003, p. 70 et seq.)

This process can be seen as the fine tuning of the beforehand estimated company value (BÖSL, 2004, p. 149). However, these indications of interest are not binding and can be revoked without any penalties for the investors. After the road show, the offer terms are revised based on investor indication of interest. Lastly, the issuer and the lead underwriter set the final offer price and number of shares to be issued. This is done immediately prior to the date when the IPO occurs (DRAHO, 2004, p. 216 et seq.).

The bookbuilding mechanism allows the issuer to learn more about the market demand than the fixed price mechanism does. Whilst this may not be true in comparison with regard to the auction mechanism, it gives the issuer in return more control about the final offer price.

Putting these two advantages together, this may be the reason why the bookbuilding mechanism is overrepresented in practice. Ljungqvist et al. (2003, p.72) estimated that bookbuilding accounts for 80% of all IPOs outside Canada and the US. For the German market and the here analyzed period between 1997 and 2010, it accounts for 94%.

2.3 The Special Role of the Underwriter in the IPO Process

During the IPO process, the issuer receives assistance from one or more investment banks and other advisors. Figure 2 (adapted from Geddes, 2003, p. 33) provides a schematic of the interested parties in an IPO. The schematic also shows that it is the lead underwriter who keeps everything together and is the main interface with the company. Even though solicitors, investor relations people and accountants also have direct contact with the issuer, it is far less wide-ranging.

A special role is indeed involved for the investment banks as in the end they carry the responsibility for the successful placement of the offer. For that reason they are appointed for extensive consulting and analyzing tasks as well as the project management (WIESMANN et al., 2001, p.42).

illustration not visible in this excerpt

Figure 2 Parties Involved in IPO and Equity Offerings

The valuation of the company is also the responsibility of the lead underwriting bank. Their task is to determine a “fair price” which balances the interests between issuer and investors (WIESMANN et al., 2001, p. 50). In fact, the underwriter is the party that has the market knowledge and thus probably most of the influence on the final offer price. Depending on their interests, this may lead to conflicts between issuer and underwriter.

The lead underwriter is usually paid a percentage of the offering price (GEDDES, 2003, p. 179). This acts as an incentive to achieve an offering price as high as possible since the underwriter is participating in that price.

However, the lead underwriting bank is usually also part of the sales syndicate which is distributing the shares to investors. For IPOs, firm commitment contracts are very common. In these contracts, it is the liability of the bank to sell the shares in the IPO. Thus each bank must be sure to have enough regulatory capital in place to meet the underwriting liability in case they are not able to sell all shares at the time of the IPO. Because if they are not able to place the shares, they have to buy the number of shares they have committed to in the underwriting agreement (GEDDES, 2003, p. 177). From that it can be derived that the lead underwriter obviously has incentives to set a reasonable price since he is taking the risk to distribute the shares and not the issuer.

These two basis conflicts have been pointed out here because of their potential influence on IPO underpricing. In the following sections this issue will be further discussed. In order to be able to understand the consequences, it should be derived from this sec-tion that the underwriter has considerable power and incentives to negotiate a final offer price that suits their own interests.

3 IPO Underpricing

3.1 Definition of IPO Underpricing and Empirical Evidence

IPO underpricing, sometimes also referred to as abnormal initial returns of IPOs, is the often observed very high first-day trading return of initial public offerings. This underpricing phenomenon leads to the question why issuers are leaving this money on the table, when they could have achieved a higher offering price (LOUGHRAN & RITTER, 2002, p. 413 et seq.).

Ibbotson (1975) as well as McDonald and Fisher (1972) among others have been the pioneers by finding that the initial performance of IPOs is positive. Ibbotson (1975, p. 246 et seq.) measured an initial performance of 11.4% during the 1960s in the United States. However, since at this time he had only access to offer prices and calendar month-end prices, this figure is not precise in terms of a first-day return.

McDonald and Fisher (1972, p. 100) find a return of 28.5% with regard to the offer price and the published market price during the first trading week for the year 1969 in the US. Since they measured the return for one year only, the high figure may be a result of extraordinary circumstances during this period.

More recent research confirms that IPO underpricing is not only a temporary phenomenon. Loughran et al. (1994, p. 167) summarize several studies of underpricing across countries. The underpricing in Germany for example amounts to 10.9% for the years 1978-92, 33% in Mexico for the years 1987-90 and 7.2% in the Netherlands for the years 1982-91 (p. 167). Figure 3 (adapted from Loughran et al., 1994, p. 167) provides further insight on how underpricing varies across countries, without going here any further into the details.

illustration not visible in this excerpt

Figure 3 IPO Underpricing Across Countries

However, empirical studies on the long-run performance of IPOs seem to enhance a different view on the “superior” performance of equity issuers. As it will be shown in section 4, several studies find that in the long-run, IPOs underperform compared to benchmarks of companies that have not been issuing equity recently.

The arising question from these findings is whether IPOs are underpriced at all and whether they are rather overpriced, taking their long-run performance into account. Purnanandam and Swaminathan (2004, p. 811) cut right to the chase of the matter, that it depends what the underpricing is with respect to.

According to them, one option is that the underpricing is with respect to fair value and that in an efficient market the market price reflects fair value. Strongly generalized, an efficient market means that stocks already reflect all available information and is based on the theory of rational expectations (Kettel, 2002, p. 300 et seq.). Thus, the increase in IPO stock prices on the first day of trading is taken as evidence of underpricing (and at the same time as evidence of undervaluation) at the offer. In that case the terms underpricing and undervaluation are interchangeable.

A different view of underpricing, in an inefficient market, “[…] is that issuers underprice IPOs with respect to the maximum price they could have charged given the observed demand in the premarket but not necessarily with respect to the long-run fair value.” This means that IPOs may be underpriced, but not necessarily undervalued.

As an example, assume that we have a situation as shown in figure 4. At the time of the offering and when the final offer price is set, the offer price is above the fair value. With regard to that fair value, the offering is overvalued. However, if we further assume that the price at the end of the first trading day is significantly higher than the offer price, we can assume that the offering was underpriced with terms to the market price of the issue. This is a situation that may occur in an inefficient market as described by Purnanandam and Swaminathan above.

illustration not visible in this excerpt

Figure 4 IPO Underpricing versus Overvaluation

Löhr (2006, p. 165) seems to put these thoughts into his definition of underpricing. He defines underpricing as the intentional or unintentional, e.g. incorrect or attributable to unexpected, „irrational“ investor behavior, determination of a bookbuilding range respectively a final offer price that is too low.

Both definitions and no matter whether assuming an efficient or inefficient market, allow defining underpricing as the abnormal first-day return with regard to the offer price issuers could have achieved. This definition will be applied throughout this paper. It still raises the question why issuers are not issuing equity at the maximum offer price they could have realized. The answer may be completely independent from the long-run performance of IPOs.

However, considering the “poor” long-run performance of IPOs it may be argued that IPOs in fact are overvalued at the offering, which also allows raises the question of whether overvaluation and underpricing of IPOs are linked to each other. Thus, the remainder of this section concentrates on theories able to explain underpricing independent from long-run performance, whereas the following section takes this factor into account. As a result, an overall view on possible reasons for IPO underpricing should be given. Nevertheless, this does not mean that the explanations offered in this paper are exclusive.

3.2 The Winner’s Curse Hypothesis

The winner’s curse hypothesis has been described first by Rock (1986, p. 188 et seq.). He argues that unexpectedly strong demand for shares results in rationing. Assuming that some investors have an informational advantage, the less informed ones will be worse off. Rock also explicitly considers institutional investors as informed and retail investors as uninformed. When informed investors are more likely to buy shares when they are underpriced, then excess demand will be higher when there is more underpricing. While the uninformed investors will receive only a fraction of the most desirable new issues, they will receive the whole order for the least desirable ones.

This is meant to be the winner’s curse: They get all the shares they have asked for only, because the uninformed investors don’t want them. Faced with this problem, less informed investors will only submit orders if, on average, IPOs are underpriced sufficiently to compensate them for the bias in the allocation of new issues. From this results that IPOs on average need to be underpriced in order to attract enough investors.

In contrast to Rocks’ explanation are the findings of Hanley and Wilhelm (1995, p. 244 et seq.). They find that institutional investors receive large proportions of IPOs for which pre-market interest is strong but almost equally for which pre-market demand is weak. Thus, for some reason it does not seem that institutional investors are able to use their informational advantage. The following market feedback hypothesis presents a theory that implicates why this may be the case, based on underwriter power.

3.3 Market Feedback Hypothesis

Benveniste and Spindt (1989, p. 344 et seq.) argue that investors initially have no incentive to reveal positive information about their demand since they know that it affects the offering price. This means that if they reveal strong demand, the offer price will rise which is to their disadvantage. Thus the underwriter needs to set the offering price low enough to provide profit in order to compensate investors for revealing positive information. Positive information here means information about their demand.

On the other hand, investors have less incentive to bid low for an issue they value high if doing so threatens their allocation. In that context, Benveniste and Spindt argue that underwriters are able to reduce underpricing by repeatedly selling to the same investors. It is possible because investors who are given regularly priority in IPO allocations earn abnormal returns. In return, the bank has then the power to menace investors to reduce an allocation in the future. This mechanism can be used to induce regular investors to be forthright with their information in the premarket.

Even if these mechanisms may be applicable to practice, evidence has not been found, yet. Thus, it is not known, whether or to which extent this explanation affects the degree of underpricing.

3.4 Bandwagon Hypothesis

Ritter (1998, p. 10 et seq.) argues that the IPO market is possibly subject to bandwagon effects. He assumes that if potential investors also pay attention to whether other investors are purchasing, bandwagon effects may develop. This means that if an investor sees that no one else wants to buy, she or he may decide not to buy even when there is favorable information. Thus, an issuer may want to underprice an issue to encourage the first few potential investors to buy, and induce a bandwagon in which all subsequent investors want to buy independent of their own information.

One may argue that this theory is based on irrational investor behavior. This is not necessarily true. Investors who observe the behavior of others can be seen to be rational as in fact their profit depends on the behavior of other investors. If they don’t see anybody buying, this may lead them to the conclusion not to invest in this particular IPO. However, it is questionable whether it can be assumed that investors, especially those who know the fair value of the asset, base their decision solely on the behavior of others. Both assumptions have not been proven, so far.

3.5 Lawsuit Avoidance

Tinic (1988, p. 798) argues that the possible negative consequences of overpricing IPOs may enhance issuers to underprice, instead. He argues that issuers may face potential legal liabilities that overwhelm the overpricing of an offering. Another threat may be that the market demands a higher risk premium on future security offerings.

In fact, for the US market, section 11 of the Securities Act of 1933 demands from investment bankers to conduct “due-diligence” investigations in order to avoid liability for false, misleading or omitted information in the registration statement about the prospects of the issuer. The law allows a purchaser of a stake in an IPO to sue anybody who has signed the registration statement, in order to recover from losses. This includes the issuer but also its advisors.

Similar regulations exist for the German market and are ruled in §§ 44 et seq. of Börsengesetz (BörsG) and § 13 of Verkaufsprospekt-gesetz (VerkaufsprospektG). The basic statement behind these regulations is that the parties involved in the issue have to pay recovery of losses to investors for incorrect prospectus information. As a result, underpricing may be seen as an indirect insurance cost for legal liabilities, if this relationship could be proven.

3.6 Signalling

Welch (1989, p. 422 et seq.) developed a model based on the assumption that the company itself has the best information about its future cash flows. This leads to an asymmetric information problem as investors do not have this information. In order to overcome the asymmetric information problem, the company wishes to signal the true value of the firm by offering shares at a discount and by retaining some of the shares of the new issue in its own portfolio. By doing so, the company will be able to achieve higher prices at seasoned offerings.

[...]

^[1] Balz (2001, p. 71 et seq.) certainly assumes that markets are inefficient, since theoretically in an efficient market over- and undervaluation do not occur.