Related to the issuance of shares there are different kinds of “puzzles” which motivate to take a closer look at: Short-run ‘underpricing’, hot and cold issue markets, spread clustering and longrun underperformance. Even though these phenomena are frequently discussed in several scientific papers and journals, there is no conclusively completed theory. This work will concentrate on the various approaches developed to explain ‘underpricing’. As an introduction into the topic it will also provide a summary of the process of an Initial Public Offering (IPO).
Inhaltsverzeichnis (Table of Contents)
- Introduction
- The Process of an IPO
- The 'Underpricing' Phenomenon
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This essay aims to explain the process of an Initial Public Offering (IPO) and critically analyze various theories explaining the apparent 'underpricing' of IPOs. It explores the puzzle of IPO underpricing, hot and cold issue markets, spread clustering, and long-run underperformance.
- The process of an IPO, including the role of investment banks and different methods like bookbuilding, fixed price, and auction.
- The 'underpricing' phenomenon, which refers to the difference between the IPO price and the first trading price on the stock market.
- Various theories that have been proposed to explain IPO underpricing, such as information asymmetry, market signaling, and winner's curse.
- The motivations and reasons behind companies going public, including minimizing capital costs, exiting venture capitalists, facilitating mergers and acquisitions, and diversifying ownership structure.
- Different practices used in the IPO process, including bookbuilding, fixed price, and auction methods.
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: This chapter introduces the 'puzzles' related to IPOs, including short-run underpricing, hot and cold issue markets, spread clustering, and long-run underperformance. It highlights the lack of a conclusive theory and focuses on various approaches to explain underpricing. The chapter also provides a summary of the IPO process.
- The Process of an IPO: This chapter defines an IPO and describes the process of going public, highlighting the key stages and players involved. It discusses different motivations for companies to go public, including minimizing capital costs, exiting venture capitalists, and facilitating mergers and acquisitions. The chapter also explores the role of investment banks, the different pricing methods, and the 'bookbuilding' process.
Schlüsselwörter (Keywords)
The main keywords and focus topics of this text include: Initial Public Offering (IPO), underpricing, information asymmetry, market signaling, winner's curse, bookbuilding, fixed price, auction, investment banks, venture capitalists, mergers and acquisitions, hot and cold issue markets, spread clustering, long-run underperformance.
Frequently Asked Questions
What is an Initial Public Offering (IPO)?
An IPO is the process by which a private company offers its shares to the public for the first time to raise capital and become a publicly traded entity.
What does 'underpricing' mean in the context of IPOs?
Underpricing refers to the phenomenon where the IPO offer price is significantly lower than the price at which the shares trade at the end of the first day on the stock market.
What are the main theories explaining IPO underpricing?
Common theories include information asymmetry between investors, market signaling of company quality, and the 'winner's curse' where uninformed investors are protected from bad issues.
What is the difference between bookbuilding and fixed price methods?
In bookbuilding, the price is determined based on investor demand during a roadshow, whereas in a fixed price method, the price is set by the company and underwriters before the offering.
Why do companies choose to go public despite underpricing?
Companies go public to minimize future capital costs, allow venture capitalists to exit, facilitate mergers and acquisitions, and increase their public profile.
What are 'hot' and 'cold' issue markets?
'Hot' markets are periods with high volume and high initial returns for IPOs, while 'cold' markets see fewer IPOs and lower underpricing levels.
- Quote paper
- Henning Padberg (Author), 2006, Initial Public Offering (IPO) and theories of underpricing, Munich, GRIN Verlag, https://www.grin.com/document/79585
