Anatomy of Initial public offering

of common stock
by Shema M Tinic
By Kamal Saeed
ID 5719580
 IPO and its pricing
Mostly new IPO were underpriced according to
observation of author.
No concrete discussion was made for the actual reason of
IPO under pricing.
Unseasoned usually gives large return.
Why ?
 Theories of Underpricing
Risk averse under writer hypothesis
Monopsony Power of Hypothesis
Speculative Bubble hypothesis
Asymmetric information Hypothesis.
 Under pricing as form of
Insurence
According to SEC act 1933 due diligence and accurate
information about the company and accurate pricing for
IPO if failed investor can sue the entire people who were
engage in issuing IPO.
PreSEC that is before1933
Post SEC thats after 1933
Hot issue.
 Initial offering of price and
probability of legal action.
Shows on paper will be explained.
 Testable implications of Theory
Reducing the lawsuit
Underpricing the IPO would cover up the liability.
Experience Investment Banker would price IPO fully
Small firm would incur greater cost to issue.
High spread for speculative firm
 Emperical investigation.
Pre SEC issued IPO was fairly price and return was
average
Post SEC more speculation and non ranked issuer issued
more IPO than ranked Issuer and return was smaller.
Statistical test showed on paper.
Issue size offering price and underpricing.
Relationship with underwriter quality and under pricing.
 After Market performance of
IPO
Large organization tap steady but average return.
Small speculative firm firstly gained abnormal return later
causing bubble and hence crash in stock price.
 Hot issue Period
Hot issue period, hot IPO during
1929,1950,1961,1968,1980 unusually speculative firm
emrging
It was difficult period to main due diligence.
 Conclusion
Reason for underpricing
Speculation
Underpricing
Further study.