The main reason why companies decide to proceed with IPO is mainly to gain access to new funding. The proceeds from the share issue itself are not necessarily intended for direct expansion. The prospects for growth from acquisitions, the funds available for organizational expansion and refinancing of current borrowings have shown, among other things, to be the main motives that newly listed companies consider as very important.
The general initial public offering procedure enhances the image and publicity of enterprises and gets not only an initial certification of the professionals in the financial markets but also a long-term price bidding (price signal) to suppliers, workforce and customers. According to Roell (1996), a robust equity value in the subsequent acquisition (during the trading of securities after their initial bid for public offering) reassures suppliers that they can safely grant trade credit, employees are convinced that they can expect a fairly stable job, and customers think that the products of the company will be supported as a result of their purchase (in the aftermath of their purchase).
Table of Contents
1. Introduction – Initial Public Offering
2. Assymetric information in general
3. Theories of asymmetric information
3.1 Information asymmetry among issuers and investors.
3.2 Information asymmetry among issuers and underwriters.
3.3 Information asymmetry among investors
4. Assymetric information and Signalling Theory
5. IPO Underpricing
6. Causes of Initial Public Offering Underpricing
6.1 Conditions of perfect information
6.2 Delay of negotiation and stock market rise
6.3 Underpricing as a hedge against legal risks
6.4 Underpricing and oversubscription of the share
7. Long-run underperformance of IPOs
8. Research
9. IPOs in US market 1985 – 1996 and Greek Market 2002-2006
10. Other international research
11. The reasons why IPO returns in the Internet sector are higher than other sectors
12. Advices to Investors
13. Conclusions
Research Objective and Key Themes
This work examines the phenomenon of Initial Public Offering (IPO) underpricing, investigating the role of asymmetric information between issuers, underwriters, and investors. It aims to determine why new shares are frequently issued at a discount relative to their subsequent market value and assesses the implications of this underpricing for investor returns and corporate signaling strategies in various global markets.
- Theoretical foundations of asymmetric information and signaling models.
- Primary causes of IPO underpricing under perfect and imperfect market conditions.
- Long-term performance trends of IPOs in US and Greek markets.
- Comparative analysis of international IPO performance and sector-specific returns (Internet sector).
- Strategic investment advice for navigating IPO opportunities and mitigating risks.
Excerpt from the Book
Assymetric information in general
In contrast to the assumptions of perfect competition, information in the real world is rarely evenly distributed. In most transactions or agreements with conflicting interests, one of the parts can be in an advantageous position relative to the information it has.
In the theory of contracts, economists classify the forms of asymmetric information typically in two categories of 'adverse selection' (Negative selection) and 'moral hazard' that is often described as the "principal-agent problem". In the first case, the asymmetry is that one party does not know the type of counterparty (hidden type). Akerlof (1970) presents a model where a buyer wants to buy a used car. In the market there are good and bad quality cars and the buyer does not have any information about their quality. Under these circumstances, the price s/he is are willing to pay, is given by the price s/he would pay for a car of average quality if it existed. At this price, the owners of good quality used cars refuse to offer their cars and the only offered cars are the ones of bad quality. The theory of contracts distinguishes two main mechanisms that can alleviate the problem of adverse selection i.e. signaling (CE) and separation (screening). In the first mechanism, the better informed party makes choices in such a way so as to send messages about its quality.
Summary of Chapters
Introduction – Initial Public Offering: Discusses the motives behind IPOs and how information asymmetry affects investor behavior and earnings management.
Assymetric information in general: Explains the economic concepts of adverse selection and moral hazard as fundamental challenges in information distribution.
Theories of asymmetric information: Details how information disparities between issuers, underwriters, and investors lead to various theoretical frameworks for underpricing.
Assymetric information and Signalling Theory: Analyzes how companies utilize capital structure and financial decisions to communicate their actual value to the market.
IPO Underpricing: Provides a comprehensive overview of the global phenomenon where IPOs are consistently underpriced.
Causes of Initial Public Offering Underpricing: Examines specific factors, including market conditions, legal risks, and oversubscription strategies, that drive underpricing.
Long-run underperformance of IPOs: Explores the empirical evidence regarding the negative performance of IPOs over a 1-5 year horizon.
Research: Presents quantitative data on the performance of IPOs in the US market compared to control groups.
IPOs in US market 1985 – 1996 and Greek Market 2002-2006: Contrasts the outcomes of different historical and regional IPO markets.
Other international research: Summarizes findings from 38 countries regarding first-day IPO returns.
The reasons why IPO returns in the Internet sector are higher than other sectors: Investigates the specific volatility and valuation risks associated with Internet-based IPOs.
Advices to Investors: Offers practical guidance for investors regarding valuation and timing when participating in IPOs.
Conclusions: Synthesizes the findings, reaffirming that IPO underpricing is a persistent phenomenon linked to asymmetric information.
Keywords
Initial Public Offering, IPO, Underpricing, Asymmetric Information, Signalling Theory, Adverse Selection, Moral Hazard, Market Efficiency, Investor Returns, Stock Market, Corporate Finance, Earnings Management, Valuation, Investment Strategy, Financial Markets
Frequently Asked Questions
What is the core subject of this publication?
The work explores the phenomenon of IPO underpricing, where shares are issued at a price significantly lower than their subsequent trading value due to information imbalances.
What are the primary themes discussed?
Key themes include asymmetric information theories, signaling, the causes of underpricing, long-term share performance, and sector-specific trends like the Internet bubble.
What is the main objective of the research?
The research aims to explain why underpricing persists globally and to analyze how investors can navigate these market conditions to achieve better financial outcomes.
Which scientific methods are employed in this book?
The book employs a review of existing economic theories and a comparative analysis of empirical data from US, Greek, and other international stock markets to support its conclusions.
What topics are covered in the main section?
The main sections cover the theory of contracts, the signaling role of capital structure, the history of IPO performance, and the impact of investor sentiment on IPO valuations.
Which keywords best characterize this work?
The most important keywords include IPO, Underpricing, Asymmetric Information, Signalling Theory, and Market Efficiency.
How does the "Principal-Agent problem" relate to IPOs?
It describes the conflict of interest where management, who possesses hidden information, may act in ways that are not aligned with the interests of external investors.
Why are Internet sector IPOs considered riskier than others?
They often lack tangible assets and possess higher fundamental valuation risk, leading to greater volatility and speculative pressure from investors seeking high growth.
What advice is provided for investors regarding IPO participation?
Investors are advised to focus on company fundamentals, use profit multipliers (P/E ratios) for valuation, and remain cautious of market hype or "hot issue" periods.
How does the book summarize the findings on Greek IPOs?
It notes that Greek IPOs between 2002-2006 were significantly underpriced, providing attractive short-term capital gains for those who gained entry.
- Arbeit zitieren
- Fotini Mastroianni (Autor:in), 2012, Asymmetric Information relating to Initial Public Offering Underpricing, München, GRIN Verlag, https://www.grin.com/document/359090
