StudentShare solutions
Triangle menu

Finance - Essay Example

Not dowloaded yet

Extract of sample
Finance

Analysis of Short-run IPO under Pricing Phenomenon in Australian Stock Market The phenomenon of under pricing of Initial Public Offer (IPO) is often considered as an anomaly that is mostly visible in the primary markets throughout the world. But the degree or extent of under pricing varies from country to country and further from sector to sector. Under pricing is defined as the phenomenon when the offer price of a new issue is lower than the price of first trade. It is calculated as difference close price on the date of listing and offer price of issue expressed as percentage of offer price of issue. In the US market, the short run under-pricing is a well known phenomenon but in order to investigate whether this phenomenon exists in the Australian stock markets or not the researcher will have to measure the short-run IPO performance by analysing the returns of IPOs that were listed between chosen time frame and remained listed up to at least 2 year holding period (Rhee, 2002, pp.1-7). By carefully analysing the IPO data of Australian stock markets since 2011, with special reference to the issue price of IPO shares and the last trading close price of the IPO stocks at the end of first day of trading after listing, it can be said that short-run IPO under-pricing phenomenon does exist in Australian stock markets. This is because the issue price of the IPO stocks were significantly underpriced compared to last trading price at the end of first of trading after IPO and listing. A careful analysis of IPO under pricing reveals that when the offer price of new issue is lower than first trading price after listing, then the stock is considered to be under priced. Now, a stock should generally be under priced when there is lack of demand in the market and that the phenomenon should be temporary since under pricing will eventually motivate investors to hold shares which will increase the demand for the shares and thus will consequently increase the price of shares (Bansal and Khanna, 2012, pp.107-108). But, in case of IPO under pricing in US market or Australian stock markets, it is often believed that IPOs are under priced on concerns of uncertainty and liquidity regarding the level of probable trade in the market after listing. Hence, in general any stock which is expected to be less liquid and less predictable will be under priced to greater extent for two primary reasons. The first reason is to compensate the investor for taking risk of holding the stock and secondly increase the liquidity of trading. The general explanation for such phenomenon is that since the issuing entity tends to have more knowledge regarding the stocks and their values compared to investors, the company must under price the stocks to motivate investors to participate in the IPO (Ritter, 1995, pp.1-4). When the firms issue their shares to public through IPO they incur both direct and direct costs. The direct cost includes underwriting fee, registration, legal, and audit fees. The indirect cost includes cost associated with under pricing. In the calculation of under pricing, the first day’s closing price represents investor expectation regarding what they are willing to pay for holding the firm’ ...Show more

Summary

FINANCE: ASSIGNMENT 2 Table of Contents Part A: Case Study – IPO Under-Pricing 4 1. Analysis of Short-run IPO under Pricing Phenomenon in Australian Stock Market 4 2. Performance Analysis after IPO 6 3. Theories Explaining Occurrence of Short-run IPO under Pricing in US or Australian Stock Market 6 Part B: Valuation – Dividend Discount Model 9 1…
Author : millscatherine
Finance essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Finance"
with a personal 20% discount.
Grab the best paper

Related Essays

Finance
The Independent Commission on banking also known as Vickers Commission was also asked to consider competition in the UK banking sector. The UK government published its formal response to the Vickers Report in 2011 and has agreed with most of the recommendations made by the Vickers Commission.
4 pages (1000 words) Essay
Finance
This process of international expansion is made possible by the business corporations depending on certain premises like conducting trades related to exporting of commodities to foreign nations, through rendering investment in business units created in foreign territories, opening up of new production units in the foreign locations
4 pages (1000 words) Essay
Finance
Finance Name Institution Table of Content Introduction 3 Main Body 4 Conclusion…8 References…9 Appendix…10 Introduction The performance of a company is essential towards its growth. There are various internal, as well as external factors that have a great influence on the success of a business (Albert, 2008).
5 pages (1250 words) Essay
Finance
Some countries cooperate and jointly develop oil export capacity, while others focus on attracting enough investment to create their own routes. The oil and gas industry in the Azerbaijani is controlled by the major company State Oil Company of the Azerbaijan Republic (SOCAR).
5 pages (1250 words) Essay
Finance
In United Kingdom all operational financial institutions are incorporated under the “Financial Services Authority” which is a self-governing non-legislative organization, aided by the legal powers under the “Financial Services and Markets Act
10 pages (2500 words) Essay
Finance
Due to this systematic risk, the values of investments can be turned down and all this can occur because of financial transformation or other incidents that can affect the market to a great
10 pages (2500 words) Essay
Finance
In this regard, it is therefore contemplated that there must be an alternative system that can be relied in order to achieve the relative stability in the financial markets. Though Islamic
1 pages (250 words) Essay
Finance
The time for money value in this article is represented through the rating of risk free in a formula compensating the investors placing for money in a given time in an investment. This
1 pages (250 words) Essay
Finance
It is calculated as difference close price on the date of listing and offer price of issue expressed as percentage of offer price of issue. In the US market, the short
10 pages (2500 words) Essay
Finance
The two companies have poor current ratios and while this would be an indicator of inability to meet short-term obligations, it is less of a threat to a long-term investment approach. Current ratio is also just a comparison of current assets and
3 pages (750 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation