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Finance - Essay Example

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un 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 ...Show more
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Summary

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…
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