...UNDERPRICING LONGAND LONG-RUN PERFORMANCE OF INITIAL PUBLIC OFFERINGS: EVIDENCE FROM THE SINGAPORE IPO MARKET VOON PEIJUN (Bachelor of Business Administration (Hons), NUS) A THESIS SUBMITTED FOR THE DEGREE OF MASTERS OF SCIENCE (BUSINESS) DEPART DEPARTMENT OF FINANCE AND ACCOUNTING NATIONAL UNIVERSITY OF SINGAPORE 2009 ACKNOWLEDGEMENT I would like to express my warmest gratitude to Professor Michael Shih for his patient guidance and encouragement all this while. A very big thank you, Sir. I would also like to take this opportunity to thank my family for their love and concern all these years. Thank you Dad, Mum and Brother. Without their support, I would not have come so far. Thank you! Voon Peijun 2009 Page i ABSTRACT The study explores the role of issue managers in the initial public offering (IPO) process. Empirical research shows that IPOs are associated with two significant market anomalies: short-run underpricing puzzle and long-run underperformance phenomenon. This paper examines the reputational influence of issue managers on the two anomalies. Employing the newly developed ‘twelve-month rolling’ reputation ranking approach, our study is the first to furnish a comprehensive ranking of all the issue managers with a substantial presence in Singapore. Based on a sample of 384 IPOs listed on the Singapore Exchange between January 1, 1997 and August 22, 2008, we find evidence of prevalent short-run underpricing and long-run underperformance in...
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...privately owned company whether going public is a possibility for attracting new capital. Research upon IPOs resulted in variables of which a conceptual and hypothesized model were created. A meta-analysis and case study should determine the relevance and reliability of the model. Thereafter, a final model can be composed which can be applied to IKEA Group, our target company for the research, in order to obtain the final result; IKEA Group is qualified for an IPO, or not. Table of contents Introduction II 1. Rationale 1 2. Situational Analysis 2 2.1 Initial Public Offering 2 2.2 Advantages 3 2.3 Disadvantages 3 3. Theoretical Background 4 3.1 Initial Public Offering 4 3.2 Product market characteristics and performance 4 3.3 Industry characteristics 5 3.4 Initial underpricing 5 3.5 Hot and cold markets and IPO waves 6 3.6 Long-run performance 6 4. Conceptual Model 8 4.1 Hypotheses 9 4.1.1 Hypotheses Independent variables 9 4.1.2 Moderating Variables 9 5. Research design 11 5.1 Unit of analysis 11 5.2 Meta-analysis 11 5.2.1 The hypothesized model 11 5.2.2 The implementation 13 5.3 Case study 15 5.4 The implementation of the results 15 Bibliography 16 Appendices 20 * * Introduction Introduction The consideration of undertaking an IPO is one of the most important and one of the most difficult processes in the lifecycle of a firm. What are the main drivers for a firm to go public, and which trade-offs does this decision...
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...ELSEVIER Journal of Financial Economics 38 (1995) 243-267 ECONOMICS Underperformance in long-run stock returns following seasonedequity offerings D. Katherine College of Business Administration, Spiess*, John Affleck-Graves University of Notre Dame, Notre Dame, IN 46556, USA (Received July 1994; final version received December 1994) Abstract We document that firms making seasonedequity offerings during 197551989substantially underperformed a sample of matched firms from the same industry and of similar size that did not issue equity. This underperformance persists even after controlling for trading system, offer size, and the issuing firm’s age and book-to-market ratio. It is similar to that previously documented for initial public offerings, suggesting that managers take advantage of overvaluation in both the initial and seasonedequity offering markets. Key words: JEL classijication: Seasonedequity offerings; Underperformance 614; G32 1. Introduction Recently, Ritter (1991) documented long-run underperformance of common stock subsequent to initial public offerings (IPOs), showing that IPOs underperform comparable seasonedfirms’ stock during their first three years of trading. This IPO underperformance has been confirmed in several studies, including Aggarwal and Rivoli (1990), Loughran and Ritter (1994), and Loughran, Ritter, *Corresponding author. This paper has benefited from comments by seminar participants at the University of...
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...FINANCE Assignment: 1 Submitted to: Sir Asif Malik Submitted by: ZAINAB HASSAN L12-5295 Section C Question A: The IPO process is characterized by information asymmetries. Explain how these asymmetries may be reduced through the book-building process. Answer: Information asymmetries exist in an IPO market as the insiders have more information about the issuing shares than the investors. Moreover, the investors as well as firms don’t have enough information about the market. There exists a greater asymmetry in IPO market as compared to secondary market because there is no former data available for it. These asymmetries are somewhat limited by using book-building process to float initial public offerings instead of public auctions. The book-building process, which was first examined in the academic literature by Benveniste and Spindt (1989) and Benveniste and Wilhelm (1990), involves shares issuing company, investors and the intermediaries which are generally the investment banks. The investment bank first decides the price range or band for the bidding and then invites investors to evaluate and perhaps buy the issue. Next, investors evaluate the issue and provide the investment bank with preliminary indications of their demand for the issue. Finally, the investment bank prices the issue and allocates shares to investors, generally allocating more shares to investors who indicate higher levels of demand. Journal of Financial Economics...
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...Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms ABSTRACT This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst’s underlying expectation of a firm’s future prospects. We extract this expectation by obtaining residual analyst coverage from a model of initial analyst following. We document that in the three subsequent years, IPOs with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable. ∗ Das and Guo are at the University of Illinois at Chicago, and Zhang is at the University of Hong Kong. We thank Eli Amir, Gilbert Bassett, Oleg Bondarenko, Konan Chan, Hsiu-lang Chen, Tim Kruse, Chao-Shin Liu, Malcolm McClelland, Roni Michaely, Tom Nohel, Ram Ramakrishnan, Cathy Schrand, Abbie Smith, Lenny Soffer, WeiLing Song, Robert Stambaugh (Editor), Steve Todd, Beverly Walther, Nan Zhou, an anonymous referee, and seminar participants at the City University of Hong Kong, Indiana University at Indianapolis, the London Business School, Nanyang Technological University, the Office of Economic Analysis at the U. S. Securities and Exchange Commission, Singapore...
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...as compared to the issuer. Sherman (2002) noted that the IPO process provides more information to certain investors and provides less information to the other investors. The initial public offering prospectus focuses on past information and performance where as the market price offerings on ballpark figure concerning the future performance. The investors such as the institutional investors get estimates and information from certain analysis such as the Wall Street Analysis where as the retail investors get no estimates and information. According to Sherman (2002), these information asymmetries may be reduced through the book building process. The book building process consists of three steps. In the first step, the investment bank chooses the investors who will be encouraged to evaluate the issue and possibly they purchase the issue. In the second step, the investors evaluate the issue and inform the investment bank about their demand for the issue. In the third step, the investment bank prices the issue and distributes the shares to the investors. The investment bank distributes more shares to the investors who have high demand. The book building process is very helpful in reducing the information asymmetries as through the book building process the issuer includes the estimates in initial public offering prospectus. The disclosure...
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... | Department of management sciences | | The purpose of this assignment is to solve and study IPO in detail and provide the necessary solutions to it. Internet has been also used with referencing to seek out the solutions. Table of Contents Content | Page no: | Question A | 4 | Question B | 5 | Question C | 10 | Question D | 12 | References | | Question A: The IPO process is characterized by information asymmetries. Explain how these asymmetries may be reduced through the book-building process. IPO (initial public offering):- The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.IPO process, are asymmetrically informed as managers and internal subjects posses private information about the firm's future prospects which may be not completely known to external investors. The process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors. A company issuing an IPO through book building method follows the following steps: * A leading merchant banker is nominated by the IPO issuing company for book building, known as Book-Runner. ...
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...the April 2002, decision of JetBlue management to price the initial public offering of JetBlue stock during one of the worst periods in airline history. The case outlines JetBlue’s innovative strategy and the associated strong financial performance over its initial two years. Students are invited to value the stock and take a position on whether the current $25–$26 per share filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 67 percent first-day rise in JetBlue stock from the $27 offer price. With such a backdrop, students are exposed to one of the well-known finance anomalies—the IPO underpricing phenomenon—and are invited to critically discuss various proposed explanations. The case provides opportunities for the instructor to develop any of the following teaching objectives, • Review the institutional aspects of the equity issuance transaction. • Explore the costs and benefits associated with public share offerings. • Develop an appreciation for the challenges of valuing unseasoned firms. • Hone corporate valuation skills, particularly using market multiples. • Evaluate the received explanations of various finance anomalies, such as the IPO underpricing phenomenon. Study Questions 1. What are the advantages and disadvantages of going public? 2. What different approaches can be used to value JetBlue’s...
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... and Post-IPO performance of China’s newly partially privatized firms$ Joseph P.H. Fana,Ã, T.J. Wonga, Tianyu Zhangb a The Chinese University of Hong Kong, Shatin, N.T., Hong Kong b City University of Hong Kong, Kowloon, Hong Kong Received 19 August 2005; received in revised form 31 January 2006; accepted 6 March 2006 Available online 24 January 2007 Abstract Almost 27% of the CEOs in a sample of 790 newly partially privatized firms in China are former or current government bureaucrats. Firms with politically connected CEOs underperform those without politically connected CEOs by almost 18% based on three-year post-IPO stock returns and have poorer three-year post-IPO earnings growth, sales growth, and change in returns on sales. The negative effect of the CEO’s political ties also show up in the first-day stock return. Finally, firms led by politically connected CEOs are more likely to appoint other bureaucrats to the board of directors rather than directors with relevant professional backgrounds. r 2007 Elsevier B.V. All rights reserved. JEL classification: G34; L33; P31 Keywords: Political connections; Corporate governance; IPO performance; Partial privatization; China We appreciate helpful comments from Stijn Claessens, Mara Faccio, Simon Johnson, Florencio Lopez-deSilanes, John McConnell, Randall Morck, Harold Mulherin, Sheridan Titman, Yijiang Wang, Mengxin Zhao, an anonymous referee, and participants in the 2003 ‘‘The Management and Performance of China’s Domestic...
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...Post-IPO Operating Performance and Earnings Management Nurwati A. Ahmad-Zaluki Banking and Finance Building, College of Business Universiti Utara Malaysia, 06010 Sintok Kedah, Malaysia Tel: 60-4-928-6451 Abstract E-mail: nurwati@uum.edu.my The present study investigates the operating performance and the existence of earnings management for a sample of 254 Malaysian IPO companies over the period 1990-2000. Using accrual-based measure of operating performance, this study finds strong evidence of declining performance in the IPO year and up to three years following IPOs relative to the pre-IPO period. This finding is consistent with the results of prior studies documenting the long run underperformance of IPO companies. The results also confirm that the decline in post-IPO operating performance is due to the existence of earnings manipulation by the IPO manager at the time of going public. Keywords: Initial public offerings, Operating performance, Earnings management 1. Introduction Existing international studies of initial public offering (IPO) companies find that operating performance had declined in the post-IPO period (Jain and Kini, 1994; Mikkelson et al, 1997; Kim et al., 2004). The majority of prior studies are based on the accrual measure of accounting profits which are potentially subject to accounting manipulation by managers, for example through working capital adjustments (Teoh et al., 1998). The most recent study of operating performance of Malaysian IPO companies...
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...the April 2009 decision of Rosetta Stone management to price the initial public offering of Rosetta Stone stock during one of the most difficult periods in capital-raising history. The case outlines Rosetta Stone’s unique language-learning strategy and its associated strong financial performance. Students are invited to value the stock and take a position on whether the current $15 to $17 per share filing range is appropriate. The case is designed to showcase corporate valuation using discounted cash flow and peer-company market multiples. The epilogue details the 40% first-day rise in Rosetta Stone stock from the $18 offer price. With this backdrop, students are exposed to a well-known finance anomaly—the IPO underpricing phenomenon—and are invited to critically discuss various proposed explanations. The case provides opportunities for the instructor to develop any of the following teaching objectives: * Review the institutional aspects of the equity issuance transaction. * Explore the costs and benefits associated with public share offerings. * Develop an appreciation for the challenges of valuing unseasoned firms. * Hone corporate valuation skills, particularly using market multiples. * Evaluate the received explanations of various finance anomalies, such as the IPO underpricing phenomenon. Study Questions 1. What are the advantages and disadvantages of Rosetta Stone going public? 2. What do you think the current market price is for Rosetta...
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... Brief Introduction Netscape Communication Corporation is going to issue its initial public offering in August 9, 1995. It is a young but rapidly growing company which is founded in April 1994 and only operates for 15 months. Netscape is also going through losses and never gain profits. But in the time of rapidly developing of the Internet, Netscape now had succeeded in capturing 75% of the Web browser market by using its most popular product, Netscape Navigator. Netscape has set the industry standard and is the indisputable leader of its kind. Netscape Navigator begun to ship in December 1994. Until then, Netscape did not earn significant product revenues. And Netscape Navigator generated more than half of total revenues for the company in the first two quarters in 1995. The other main source of revenues is generated by Netscape’s server and integrated applications products. In terms of the market share, we can say that Netscape has a promising future by using its excellent Web browser, Netscape Navigator. Another reason for its promising future is the industry background that Internet is in a rapidly developing position. However, Netscape is also facing kinds of competition in every market. Its main competitors are Spyglass, America Online and Microsoft. Microsoft, the powerful PC software company was going to release its long‐awaited Windows 95 operating system, which included a rival browser in ...
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...Key factors in IPO 1. Effective management team As a company prepares for its IPO, it must expand its management capabilities. Who runs a company is what sells the IPO. Investors expect to see very knowledgeable, experienced professionals who are committed to the long-term success of the company. Thus, the company has to hire some individuals with public company experience in marketing, operations, development, and finance. And the company may also put in place a CFO, who has previously been through the IPO process. 2. Good underwriter A good investment banker is critical for the IPO. The underwriter will draft prospectus, assist with the filing, find investors, determine the offering price and sell the stock. Thus the company should conduct due diligence on a number of underwriters to assess which one is the right for it. And the company can find an underwriter that specializes in the company’s own industry, through this way the whole IPO process will go smoother. 3. Thorough IPO readiness assessment As company prepare for an IPO, an IPO readiness assessment can be useful to identify the big-picture issues and prevent the problems that will lead to the failure of the IPO. Besides, the IPO readiness assessment also helps the company to establish a timetable based on the actual work that needs to be done in the whole IPO process. 4. Early established IPO structure Successful IPOs determine the IPO structure at the beginning of the process. Existing stakeholder concerns...
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...Technology & Science, K.K Dist, T.N, India ABSTRACT Oversubscription during IPO is the result of demand over supply due to investors’ keen interest and expectation to subscribe new shares. Grading agencies play a major role in attracting investors to subscribe shares during IPO. This is due to the ‘trust’ that investors have on the grading agency, regarding its capability to perform research on the key fundamental indicators. Informed and knowledgeable investors act vigorously to get maximum shares during the initial public offer. Book building pricing method plays vital role in attracting the investors who anticipate efficient price discovery. The study attempts to provide insights to investors on how significantly efficient the listing prices of oversubscribed shares between 1 to 5 grades by approved rating agencies are; as well as the profitability in investing oversubscribed IPOs with respect to the 1) Close price of the listing day 2) Short term and 3) Long term returns in both manufacturing and service sector. Key words: Book building, Grading, Hot Issue Market, IPO, Under-pricing) Cite this Article: Biju Thomas Muttath and Dr. Assissi Menachery, Investor Expectations on ‘Return’ and ‘Trust’ on IPO Grading: An Empirical Analysis....
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...Mr. Andreessen’s strategy was: “give away today and make money tomorrow”. The successful intuition of Andersen lied on the fact that Netscape could reach a high degree of success (make money tomorrow) only if its software was known and used by the public. Thus, Andreessen was committed to distribute of software for free, as well as to a heavy invest in R&D. This strategy generated initial negative cash flows and clearly it was not sustainable in the long run. In order to become highly successful, Netscape had to be able to find the means to continue the invests in R&D, set the industry standard, outperform the competition, and ultimately be profitable. When Andreessen initiated his strategy the market was not competitive. However, Microsoft had the financial means and the reputation to potentially become Netscape’s direct competitor. Netscape was able to set the industry standards and create a good reputation. Ultimately, when the IPO took place, investors perceived the company to be the new leader in the market. Currently, the market is very competitive and the same strategy that made Netscape so successful it may not lead to the same results. New tech companies who focus on high growth, tend to raise capital in three main ways: creating an alliance, through venture capital or through IPO. A strategic alliance, would have provided not only capital but also assets to create economies of scale. It seems that an alley would provide much more than what Netscape needs...
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