The Pricing of Infrastructure
Initial Public Offerings:
Evidence from Australia
Bill Dimovski (Deakin University)
IPOs and Underpricing
IPOs are common around the world.
 Returns on average, have been
substantial.
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IPO underpricing around the world
States
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Australia
Ibbotson’s 1960-9
11.4%
Ritter’s 1974-82
14.8%
Ibbotson, Sindelar
and Ritter (1994
18.4%.
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How et al 1980-89, 19.74%
for industrials and later How
reports 107.2% for miners
Lee, Taylor and Walter’s
1976-89 16.4%
Dimovski and Brooks 199499 25.7% underpricing.
Dimovski and Brooks (Gold)
Mining (2008) 13.3%
 United
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Underpricing around the world
 Other
Countries [From Ritter
(2003)]
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Malaysia 104.1%
UK 17.4%
Hong Kong 17.3%
Japan 28.4%
Canada 6.3%
Brazil 78.5 %
China 256.9%
Etc,etc
Some theoretical explanations
of underpricing
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Rock (1986) - IPOs need to be
underpriced to continually attract
uninformed investors
Leland & Pyle (1977), Welch (1989)
underpricing allows for subsequent
share issues at a higher price.
Benveniste & Spindt (1989)
underpricing to attract investors
without waiting till listing
Tinic 1988 suggests that
underpricing is like an insurance prevents against damages to
underwriters/directors

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Baron 1982 - underwriters
discount the shares to sell
easier.
Ruud (1993) - underwriters
price support the issue for a
short period
Uncertainty and underpricing

Beatty & Ritter (1986)
greater uncertainty - greater
underpricing
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Larger issue size;
higher issue price;
older entity;
more reputable underwriter;
more reputable
accountant/auditor;
existence of a banking &
venture capital
relationships;
REIT IPO Research
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United States
Wang, Chan and Gau (1992) 1971-88,
87 REITs report a negative 2.82%
underpricing return (loss)
Ling and Ryngaert (1997) 1991-94, 85
REITs report a 3.6% underpricing
return

Japan
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Kutsuna, Dimovski and Brooks (2008)
0.5%
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Australia
Dimovski and Brooks(2006) 37
LPT IPOs during 1994 to 1999 ave. 1.2% but not significantly
different from zero. Later Dimovski
(2009) sample, 2002 to 2008 REIT
IPOs following the introduction of
the single responsible entity role.
There appears to be slightly
higher underpricing.
Infrastructure Research
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Peng and Newell (2008) suggest Infra
entities have highest returns and
highest volatility for 11 years to 2006.
A$55 billion mkt cap
Useful diversification benefits
Neilson (2005) suggests pension funds
have A$8 billion invested in infra
assets and by 2012 could have up to
A$65 billion
Newell and Peng (2008) pension funds
globally considering infra investments.
US infra investments also have useful
diversification benefits.
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Peng and Newell (2007) suggest
infra entities have monopoly
attributes, high operating margins,
predictable earnings and cash
flow due to regulation / long term
contracts. – Lower uncertainty.
Dewenter and Field (2001) HK –
case study 7 infrastructure IPOs
51.1% underpricing to 18.7%
overpricing
Yong (2007) current state of IPO
research – no studies other than
Dewenter and Field (2001)
Data
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Connect 4 Company Prospectuses database.
30 Australian infrastructure IPOs
Feb 1996 to June 2007
Mean underpricing 3.5%, median 0.3%. Not stat different to 0.
Ave cap raising A$350m. Smallest $3.5m, largest $1.6bill.
Mean money left $3.7m, median $75000. Not diff to 0.
Ave time to list 41 days.
Ave listing cost was 5.2%.
Ave forecast div yields – 6.87%.
Models
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Day 1 Return =
Size of cap raising,
Market sentiment,
Time to list,
Percentage total cost,
Whether underwritten,
Forecast dividend yield,

(1).
Money left = size of cap raising, market sentiment, time to list,
percentage total cost, whether underwritten, forecast dividend yield
and 
(2).
The Results
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Table 2 – Underpricing – partitioned underwritten issues - positive and
significant relationship between div yield and higher first day returns; perc total
cost and higher first day returns.
This suggests that those that forecast higher divs may have higher uncertainty
about them and offer a higher return to subscribing investors. Similarly those
that pay more in direct costs to list have more uncertainty about their value.
Table 3 –money left - a negative and significant relationship between proceeds
and money left.
Larger infrastructure IPOs leave less money meaning they are priced more
accurately
Summary
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Infrastructure IPOs do not have significantly different to
zero first day return or money left characteristics
Not a great deal of uncertainty about their valuation –
consistent with Peng and Newell (2007) – predictable cash
flows, captive customer base, barriers to entry etc.
It appears that given the substantial amounts of new
equity raised in this area of infrastructure IPOs, bankers
may be working particularly hard on appropriate
valuations.