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Corporate Finance/the corporate form and initial public offerings - Assignment Example

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Corporate Finance/the corporate form and initial public offerings

The sellers are more knowledgeable than the buyers so for the convenience of the buyers they are supported by intermediaries who are trustworthy and who would advice the buyers whether the sellers are reliable or not. Such intermediaries are popularly known as underwriters. Corneilli and Glodreich observed that the information knowledge of the buyers and sellers are very different, this difference in information is known as information asymmetric. These asymmetric can be removed by the book building method. Book Building is one of the ways in which the shares can be offered to the public. This process generates captures and records investor demands for shares during the initial public offering. In this method the issuer basically appoints an investment bank to act as an underwriter (Gregoriou, 2011, p.219). It is the process in which an underwriter “build a book” by taking orders from the fund manager or from the buyers or the institutional investors indicating the number of shares and the price they are willing to pay for the shares. By this the price is set according to the coordination and the knowledge of both the parties namely the buyer and the seller. The investment bankers offer more shares to the bidders who provide maximum information in their bids. The regular investors are given an edge in allocations mainly on occasions when the issue is oversubscribed heavily. From this it is evident that information asymmetric in initial public offering will be mi minimized by using the book building method of IPO. Ans. (b) Researchers have observed that shares are under priced in short term and over priced in long term. The under pricing of IPO’s are the most extensively investigated empirical topics in finance literature. Under pricing can be defined as the phenomenon of difference between the offered price and the market price during the period of first trading in the secondary market. Empirical studies have shown enormous difference between the countries and their time periods. As for example the under pricing of IPO’s of Denmark between the years 1984 to 1998 war 5% whereas under pricing of the IPO’s of China between the periods 1990 to 2000 was greater than 250%. The variation among the countries in different periods is quite large. Different researchers have developed different models for providing an explanation for the under pricing of the initial public offering. Jenkinson has come up with 60 theories to explain the concept of under pricing. They can be categorized into four broad categories namely I) asymmetrical information amongst different parties namely the underwriters, issuers and investors who are involved in the process of IPO and which brings about uncertainty with respect to value of the firm. Ii) Institutional Theories which emphasize on factors of legal liability and stabilization of price. Iii) Considerations which focus on the control of the firm and issues of corporate governance. iv)The behavioural approach which assume the presence of investors who are irrational. The most effective theory in the asymmetric models is the Winner’s Curse of Rock. Asymmetric information happens when one individual or an organization knows more than the other individual or organization. This model assumes that some of the investors have better information available related to the value of the ...Show more


Corporate Finance / the corporate form and initial public offerings Table of Contents Ans. (b) 4 Ans. (c) 6 Ans. (d) 8 References 10 Ans. (a) Initial Public Offering is the process of offering the stocks and shares by a company to the general public which intends to raise capital for the first time…
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