The Initial Public Offering (IPO) which marks one the most important events of a
company basically aims to generate maximum proceeds by selling company’s shares
to investors. Nevertheless, the shares they sell often seem to be underpriced, insofar
that the price significantly soars on the first trading day. Consequently, the company
generates fewer proceeds and, hence “leaves money on the table.”
Since the very first detection of this phenomenon in the United States in 1969, several
subsequent studies documented the existence of worldwide IPO underpricing nowadays.
Considering that underpricing is costly for the company, a question arises
why, therefore, despite the fact that the companies “leave money on the table”, they
do not try to avoid this by setting the issuing price on the very high?
One of the most striking features of this question is that it had inspired many researchers
who tried to explain in various models why IPOs are generally underpriced.
Besides, a lot of theoretical explanations concerning this phenomenon have
been given by now; however, no common sense has been so far developed.[...]
Table of Contents
1 Introduction
1.1 Problem Statement
1.2 Methodological Approach
2 Initial Public Offerings
2.1 The IPO
2.1.1 Typology and Motivation
2.1.2 Disadvantages
2.2 Going Public
2.2.1 The IPO Process
2.2.1.1 Phase I: Preparation of the IPO
2.2.1.2 Phase II: Structuring & Valuation
2.2.1.3 Phase III: Marketing & Roadshow
2.2.1.4 Phase IV: Pricing & Trading
2.3 Exchange Listing
2.3.1 Requirements in Europe
2.3.2 Requirements in the U.S.
3 IPO Underpricing
3.1 Definition
3.2 Motivation and Impact
3.2.1 Information Asymmetry
3.2.1.1 Between Groups of Investors
3.2.1.2 Between Underwriter and Investors
3.2.1.3 Between Underwriter and Issuer
3.2.1.4 Between Issuer and Investors
3.2.2 Institutional Explanations
3.2.3 Ownership and Control models
3.2.4 Behavioral Explanations
4 Evidence of IPO Underpricing
4.1 The European Stock Market
4.1.1 Data Base and Descriptive Statistics
4.1.2 Interpretation
4.2 The U.S. Stock Market
4.2.1 Data Base and Descriptive Statistics
4.2.2 Interpretation
4.3 Consequences
5 Conclusion
Objectives and Research Focus
This thesis examines the phenomenon of IPO underpricing within European and United States stock markets. It aims to clarify the definition of underpricing, identify the motivations driving this occurrence, and provide empirical evidence regarding the presence and magnitude of underpricing in these major capital markets.
- Examination of the IPO process, valuation methods, and regulatory requirements in Europe and the U.S.
- Theoretical analysis of information asymmetry, institutional factors, and behavioral models related to underpricing.
- Comparative analysis of IPO performance in European and U.S. markets between 1997 and 2012.
- Investigation of specific case studies, including the Facebook and Visa IPOs, to analyze lockup effects and market behavior.
Excerpt from the Book
3.1 Definition
Although there are several understandings in the literature of the “Underpricing” in the context of IPOs, there exists no consistent definition. Based on most literature, Underpricing can be generally described as “the difference between the price obtained by the shares at the close of the first trading day and the price of the offer.”
The Underpricing (UP) is generally calculated by using the following equation:
UP = (P1 - Ei) / Ei
Where: UP = Underpricing of the share i; P1 = First day closing price of share "i"; Ei = Issue price of share "i"
So as soon the issuer price (Ei) is lower than the first day closing price (Pi), the IPO is said to be “Underpriced.” But when the issuer price (Ei) is higher than the first day closing price (Pi), the IPO is the other way round said to be “Overpriced.”
Although there are researchers who prefer to use the first opening price instead of the first day closing price to calculate, most studies use the first day closing price when computing initial Underpricing returns. Based on this, all computation in this work will apply the general UP-Formula illustrated above.
Underpricing, on the one hand, for example, means that new investors who buy the shares at the issue price on average realize very high returns while, on the other hand, the existing shareholders transfer wealth and the issuers simultaneously “leave money on the table.”
Summary of Chapters
1 Introduction: This chapter defines the scope of the thesis, introduces the problem statement regarding IPO underpricing, and outlines the methodological approach used for the analysis.
2 Initial Public Offerings: Provides a comprehensive overview of the IPO process, including typology, motivation, various listing requirements in Europe and the U.S., and the practical stages of going public.
3 IPO Underpricing: Discusses the theoretical framework of underpricing, covering information asymmetry, institutional explanations, ownership/control models, and behavioral finance perspectives.
4 Evidence of IPO Underpricing: Presents an empirical investigation of IPO performance in Europe and the U.S. from 1997 to 2012, utilizing descriptive statistics and case studies to validate theoretical underpricing models.
5 Conclusion: Synthesizes the findings of the thesis, answers the central research questions, and summarizes the systematic nature of IPO underpricing as observed in both markets.
Keywords
Initial Public Offering, IPO, Underpricing, Stock Market, Europe, United States, Bookbuilding, Information Asymmetry, Efficient Capital Markets Hypothesis, ECMH, Institutional Explanations, Behavioral Finance, IPO Performance, Market Listing, Underwriter
Frequently Asked Questions
What is the core subject of this master's thesis?
The thesis focuses on the phenomenon of IPO underpricing, specifically analyzing why companies often sell their shares at prices significantly lower than their first-day market value in European and U.S. stock markets.
What are the central thematic fields covered in the study?
The study covers the IPO process, mechanisms of pricing (such as bookbuilding), regulatory listing requirements, theoretical explanations for underpricing, and comparative empirical evidence from historical data.
What is the primary objective of this research?
The primary objective is to investigate why IPOs are generally underpriced, identify the theoretical drivers behind this, and empirically test these theories using data from European and U.S. markets over a 15-year period.
Which scientific methods are employed?
The work utilizes a combination of theoretical literature review, comparative analysis of listing requirements, and descriptive statistical analysis of historical IPO performance data retrieved from databases like Bloomberg and Deutsche Börse.
What topics are discussed in the main body?
The main body covers the mechanics of going public, detailed theories on underpricing (asymmetry, institutional, behavioral), and a comprehensive empirical evidence section comparing market performance and the impact of the dot-com bubble and subsequent crises.
What are the key terms characterizing this work?
The work is characterized by terms such as Initial Public Offering, IPO, Underpricing, Information Asymmetry, and Market Efficiency.
How is the Facebook IPO analyzed in this context?
The Facebook IPO is used as a case study to illustrate the intervention of underwriters in price stabilization and to explore how high-profile IPOs can deviate from standard performance patterns due to market expectations.
What role does the lockup period play in IPO underpricing?
The study highlights how the lockup period, which prevents insiders from selling shares immediately after an IPO, influences their motivation to strategically underprice shares to ensure a price increase at the time of expiration.
- Citar trabajo
- Oliver Reiche (Autor), 2013, The Phenomenon of IPO Underpricing in the European and U.S. Stock Markets, Múnich, GRIN Verlag, https://www.grin.com/document/229450
