The Under Pricing Of Initial Public Offerings - Free Essay Example

Sample details Pages: 8 Words: 2393 Downloads: 9 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? à ¢Ã¢â€š ¬Ã…“Investopedia.com defines initial public offering as 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. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market.à ¢Ã¢â€š ¬?  [1] IPO INITIATION AND THE PHASES OF IPO TRANSFORMATION: Any IPO goes through the following stages of transformation: à ¢Ã¢â€š ¬Ã…“The pre-IPO transformation phase can be considered to be a restructuring phase where a company starts the groundwork toward becoming a publicly-traded company. Furthermore, companies should re-examine their organizational processes and policies and make necessary changes to enhance the companys corporate governance and transparency. Most importantly, the company needs to develop an effective growth and business strategy that can persuade potential investors the company is profitable and can become even more profitable. On average, this phase usually takes around two years to complete. The IPO transaction phase usually takes place right before the shares are sold and involves achieving goals that would enhance the optimal initial valuation of the firm. The key issue with this step is to maximize investor confidence and credibility to ensure that the issue will be successful. The intent of these action s is to prove to potential investors that the company is willing to spend a little extra in order to have the IPO handled promptly and correctly. The post-IPO transaction phase involves the execution of the promises and business strategies the company committed to in the preceding stages. The companies should not strive to meet expectations, but rather, beat their expectationsà ¢Ã¢â€š ¬?  [2] The marketing process of going public is marked by what is called à ¢Ã¢â€š ¬?road show.  road shows involving Issuers and key managers of the company to potential investors via presentations in major cities and face to face with the target investors (Ritter, 1998).  These presentations focus on business operations, products and services, and management.  The visit aims to assess the expected demand for the shares of the company and serves as a key input in the final determination of the initial price of the shares At the end of the road shows, and just prior to the actual first day of trading (usually days before opening day), directors and underwriters will determine the initial offering price.  This is quite important because once the price is determined there is no scope of increasing it even if there is high demand for it. This is how stocks become underpriced. By the close of the first trading day a huge difference can be seen between the actual price and listed price. The concept of under-pricing is dealt with more detail in the following section. Don’t waste time! Our writers will create an original "The Under Pricing Of Initial Public Offerings" essay for you Create order THE CONCEPT OF UNDERPRICING Under-pricing is the difference between the initial offered price of the stock and the price at the closing of the first day of trading (Ibbotson, 1975, Ibbotson, Sindelar and Ritter, 1988 Ritter, 1998). This undervaluation is not unusual for companies to commit. To illustrate, suppose the initial price of a firm issuing 1 million share is $100/share. This would result in a capital of $100 million for the company when all the shares are sold. Now suppose towards the closing of the day, the share is traded at $150. This would mean that the share was underpriced by 50%. This results in an available profit of $50 million for the initial investors. This phenomenon is seen universally across developed and developing countries. This trend of under-pricing can be seen as going against the concept of market efficiency and may cause distress to firms trying to collect capital for expansion. In this regard much research has been done and much literature has also been written. The theory of efficient markets suggests that the price of newly issued shares will quickly adapt to all relevant available information in the market (Fama, 1970) reflect.  However the constant undervaluation has raised questions about what happens when companies go public.  The decision to go public is one of the largest in corporate finance.  Even developed economies like the US, a number of large companies are not public. This shows that going public is not mandatory for a company but it is a choice. However there is a clear disparity between companies choosing to use the stock market and the companies that do not.  A company basically goes public to either diversify their portfolios or to raise capital to invest in future projects. Some other reasons why a company might opt for going public include overcoming debt, change of controls and to enhance opportunity. WHY ARE IPOs UNDERPRICED à ¢Ã¢â€š ¬Ã¢â‚¬Å" A LITERATURE REVIEW There are direct and indirect which are borne by the company when an IPO is issued. The indirect cost is the cost associated with information provision to the stock market and the direct costs are the numerous costs which are associated with fees and charges such as the underwriting fees, legal fees and auditing fees etc. However the most important among these and probably which affects the stock price once it is issued is the dilution associated once the shares start to change hands in the public. Often IPOs are found to be underpriced due to this dilution costs. Moreover the IPOs are often subject to the practice of book building. à ¢Ã¢â€š ¬Ã…“Book building refers to the process of generating, capturing, and recording investor demand for shares during an IPO (or other securities during their issuance process) in order to support efficient price discoveryà ¢Ã¢â€š ¬?.  [3]  In the event of an issue going public, the issuer always fixes a price band and allows the investo r to quote a price within this price band. The upper limit of this price band is the maximum possible price to be paid for the IPO and hence there is a chance that the issue becomes underpriced in case there is excessive demand for the stock. In this the valuation of the stock often reaches an estimate before the stock transacts in the market. As such there is a chance that the stocks get oversubscribed. A peculiar trend can be seen in case of IPOs. The returns are quite high in the initial period. But over a short period of time this return is normalized or completely minimized and the stock starts to trade at a value close to its actual issue price. Therefore it may be wrong to assume that the stock is actually underpriced at the time of issue. Several factors can affect its high return which can include a bullish market also. à ¢Ã¢â€š ¬Ã…“Rock (1986) and Baron (1982) explained this under-pricing through their models. Baron assumed that investment bankers /underwriters posse ss more information on the demand of the security than the issuer. The issuer has to compensate the underwriter for this superior information set. Rock assumed that there are two groups of investors in the IPO market which are categorized as the informed investor and the uninformed investors. Systematic under-pricing is needed so that the uninformed buyers can earn a normal expected returnà ¢Ã¢â€š ¬? The price formation process for IPOs may be susceptible to the existence of significant conditional price trends in the short-run aftermarket for several reasons: First the market takes time to adjust to the amount of analysis done on the announced issues and this time can extend over several months. There is a great deal of skepticism around the IPOs because of the scarcity of public information available at the time of initial offering. Thus their true value seems highly uncertain to the public. The initial return of the stock is actually the first reaction of the people and go es on to show how the people assess the stock against the initial offering. Second, the first market price may fail to reflect fully all available information because of the potentially fragmented market for IPOs. The issue size of IPOs is typically small and the underwriters, often facing excess demand, ration new issues to their regular clients, who constitute a small subset of potential investors. Initial trading in the aftermarket serves to disseminate information about the value of IPOs to other investors. While initial upward price movement of underpriced IPOs spreads favorable information, the available supply of shares is restricted because underwriters typically discourage initial subscribers from selling their allotments in the aftermarket. Investors who were unable to obtain their full subscriptions at the offering may seek to buy shares in the aftermarket, resulting in a sequence of daily positive returns. In the case of an overpriced issue, the first market price fai ls to reflect the available information because of price stabilization by the underwriting syndicate. The under-pricing can be explained with the help of many hypotheses. These are discussed below: The Risk-Averse-Underwriter hypothesis: In order to mitigate the risks and costs of underwriting the underwriters usually knowingly undervalue the stocks. However the investment bankers readily do their homework and they have a fair idea of the actual value of the stock. Therefore this hypothesis only seems meaningful when there is a scope of book building and not when there is a case of fixed price offerings. Since both book building issues and seasoned equity offerings were historically underpriced, one cannot say that the main motive of under-pricing were the investment bankers desire to averse risk. The Monopsony-Power Hypothesis (Ritter, 1984): The investment banker enjoys monopsony power while analyzing common stocks of small firms. They then ration these to the most influe ntial customers who have maintained good relations in the past. Further reasoning by different analyst suggested that this under pricing can also be targeted at earning excess income in the form of commission and fees. (Ritter, 1984) suggested that the gross under pricing might be result of the monopsony power of the investment bankers in underwriting common stocks of small speculative firms. According to Ritter, the investment bankers intentionally under price the securities and ration them to their large customers who regularly buy a variety of investment services from them. The Speculative-Bubble hypothesis: This hypothesis says that one of the reasons for stock price to boom is due to those investors who could not grab a share during the IPO (because of oversubscribing) and those who speculate that the prices of these stocks will rise in the future. This was typical during the IT boom period. The point to wonder is what determines the true value of the stock. The true valu ation and the quality of the IPO can be analyzed by the following: Retained Equity Since firms can determine how much equity they will give out at the time of initial public offering. Since this figure can be obtained in advance therefore it serves as the most relevant and the most researched. Since the pre-IPO ownership of firm is determined and very unlikely to change, this becomes an extremely difficult signal to imitate. It must be noted that any change in such information prior to the IPO can dampen the enthusiasm of the investors and might have significant impact on the value of the stock. Underwriter prestige The market value can be significantly changed due to the prestige attached with the underwriter. Those investment bankers who have a good reputation in the market will signal less uncertainty about the performance and offer value of the IPO. The valuations done by these investment bankers will be considered with less speculation But even in the face of a prestigious investment banker doing the valuation, there is significant chance of under-pricing. These underwriters play with two key constituents in the IPO process. The underwriters representing the firm forms the first and the client base for whom the securities are marketed. The first constituent is the firm whose securities the underwriters represent. The second is the client base to whom the underwriters market the IPO securities. Auditor Reputation The price of the IPO can also be influenced by the auditor reputation. The auditors who are deemed as high quality will be judged with very less speculation and the investors will fairly accept the value of IPO set forth. If the auditor fails to reveal potential negative firm information, then the reputation of these high quality auditors may suffer. In some cases shareholders can also file a lawsuit. Number of Risk Factors The prospectus revealed by the issuer also details the risk factors pertaining to the company. The purpose for this is to let the investors assess the fair value of the IPO and the possible opportunity that might exist in investing in this IPO. Firms with more risk factors can be associated with higher uncertainty. Firms with greater numbers of risk factors are associated with higher uncertainty. Firm Size Larger firm size often has greater resources and more opportunity to survive in extreme situations. Thus the firm size also motivates the price of the IPO. Several studies found that there is a negative correlation between underpricing and firm size. This is consistent with the relation between large firm size and more stability. Thus potential investors trust the IPO price to be close to its fair value when large firms are at stake. Moreover the larger firms also are associated with more prestigious underwriters. Firm Age The more the age of the firm will act as a protection from the risk and this is used in valuing the price of the IPO. This is because the younger firms have less number of published financial data and hence the valuations done for these firms are often subject to uncertainty. Moreover these firms are also not analyzed by financial analyst. Firm age and performance are often related. Offer Price One of the responsibilities of the lead investment bank is to assess the pre market demand for its clients prospective IPO in an effort to set a reasonable price. Thus this initial price might also instigate some amount of under-pricing. Also it has to be known that a very modest price will signal less demand and less value or maybe both. The initial price of an IPO offering may also have value as an indicator of underpricing. In the early stages of an IPO, the lead investment bank is responsible for assessing the premarket demand for its clients prospective IPO in an effort to set the offer price. Presumably, a very modest offer price will signal little demand, little value, or both

The Last Voyage of Columbus - 1100 Words

The Last Voyage of Columbus In his book, Martin Dugard uses dramatic detail and imagery to attract the readers attention. At times it feels as though the book is even fiction, but the selected bibliography in the end, defend with certainty this books authenticity. If there were no speculations on the character of Columbus by the lector, then the book will leave the lasting impression that like us, Columbus was human as well. He was not a saint, and had his fallouts. His life was not a complete joy ride, but the ending of the book gives the reader the sense that Columbus was a man of exuberant character: â€Å"live a bold life rather than settle for mediocrity.†(p.268) Divided into four sections: Prelude; Love Hope and Sex and Dreams;†¦show more content†¦The ideas that Polo shared, matched directly with another book called Geography, another man later on came out with the three-dimensional globe. This only gave Columbus’ idea more credit, he wanted to go to Asi a, the Sovereigns were his only hope. King Ferdinand and Queen Isabella, were the only people that helped Columbus on his first voyage. At first they were completely unwilling to help, but an advisor from the court told the King and Queen that there was not much to lose with Columbus. If he made it back, the Sovereigns would have first hands on any land that Columbus would have found. They liked the idea. The only downside was that the Sovereigns would only be making a small investment in Columbus. If he failed and perished in the ocean, they would never hear from him again. It was a win-win situation. If he did find Asia, then he would bring back something more precious than gold, or silver,and pearls; they wanted pepper, a spice only found in the east. Through out the first chunk of the book, many details and names are given, but the most important is Juan Rodriguez de Fonseca.Throughout Columbus’ life, Fonseca plays a very important role as the man that causes many - if no t all of Columbus’ failures and difficulties. At the time Columbus was interested in sailing to Asia, Fonseca was the royal auditor of the Indies. Colonization was his priority, but in the end King Ferdinand used Fonseca to steal Columbus’ power over the region ofShow MoreRelatedChristopher Columbus And The Discovery Of The Americas1303 Words   |  6 PagesAt the beginning of the book Christopher Columbus and the Discovery of the Americas, the author Tim McNeese is telling us a general explanation of why Christopher Columbus is so recognized. 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Defining Modernity in America Free Essays

When I think of modernity I think of change. Modernity is the act of how and why things progress, move forth and new ideas emerge throughout history. It is also the effect of these changes. We will write a custom essay sample on Defining Modernity in America or any similar topic only for you Order Now Such changes can be seen from about 1400 to now. It is these changes that have occurred that allow us to live in a post modern society. Modernity is the act of change throughout history. Religion is constantly changing. This force unifies and separates people. Changes in religion occur for many reasons. Some may see any particular aspect of their religion overlooked and set out to tell people why we should reexamine our beliefs and change the method in which we worship. Martin Luther was on person who had seen how his method of worship should change. Ultimately he established a new form of Christian religion called Lutheranism. This movement and movements similar to his has changed the way some will worship for centuries. Of all the things that bring about new ideas and change discovery has to be perhaps the most influential to change. There are two ways in which discovery is accomplished one is to search for something new and the other is to make findings purely be accident. Both methods of discovery often happen through observation. The finding of Charles Darwin and his observation of finches is one of the most influential and controversial discoveries of our time. If not for his observations science and religion would be very different than they are today. If discovery leads to change then education must as well. Once education was only for the rich and powerful. But as education spread man has changed. Education has helped lead man to towards more knowledge changing how society and the individual thinks, acts, and socializes. This knowledge has allowed man to recreate him/her-self, it has given man the ability to logically act on choice and decide what is write or wrong. Many have said that education is the key. Believe this because imagine how many doors would still be locked without it. Becoming a global civilization is also an important part of our society. This has often been a goal of main stream culture throughout most of history. Through trade we have succeeded. International trade has allowed the world to communicate with each other. It also gives all countries around the world an standard idea of many cultures, who they are, how to interact with these cultures, the value of many resources and product. It also allows us to share ideas, learn, and make friends and unfortunately make enemies with other cultures. Technology has also changed our way and standards of living. It has changed how we live in the world that it has made. First from an agricultural society to an industrial society. What had come from industry is specialization and the standard work day. No longer were farmers the majority of the workers Many didn’t work from morning to night, instead getting paid for what they produced people got paid for how long they worked. With this new technology there were such creations as the television, weapons of mass destruction, and eventually the computer. Now we have come from a society that produces things to a society that produces thoughts. Through technology of life styles have changed and will continue to change. Modernity is the process of change through out history. It how and why we as a society change. It is also how and why things progress, discovery effects us, and new ideas are born throughout history. Modernity is why we are effected by these changes. It is also these changes through out history that allow us to live in a post modern society. Modernity is the process and act of change through out history. How to cite Defining Modernity in America, Papers

Exclusion And Vicarious Liability Management-Myassignmenthelp.Com

Question: Discuss About The Exclusion Clause And Vicarious Liability Management? Answer: Introducation The main issue of the case is to decide the real position of the Qantas Airlines and whether there is any breach of contract present in between the Airbus Corporation Limited or not. The present case is based on the contract and certain professions are incorporated under this case. It is a common rule that in a agreement of contract the parties are liable to follow all the rules and regulations mentioned under the conditions department of contractual agreement. If the party or any of the parties could not able to meet, the requirements properly lovely pose against them and restrict them to do that thing. However, there are certain exceptions to the rule. It wasnt stated under the contract law that if the party or any of the party could not able to see certain professions paragraphs and without seeing them accept the same he will be get certain benefits under the exclusion clause. It has also been stated under the law that the law of contract is based on the offer and acceptance. A pe rson who won to deliver a sell certain things makes an offer and the other party have to show their interest and accept the offer matter. There are certain rules regarding the term acceptance. A person has request to accept anything after understanding all the Essential elements of the offer. However, if there is certain paragraphs mentioned under the contractual agreement and that are written in such a way that the accounting could not able to understand the inner meaning of the condition or failed to go through the condition as well, law will provide certain excuse under the exclusion clause to secure the interest of the party. In this case also the rule regarding the exclusion clause will be imposed on the party. It is common under the law of contract that the base of contract could not make without offer and acceptance. There are certain paragraphs mentioned that until the offer is accepted by the other party there will be no contract exist. There are certain provisions mentioned under the law of acceptance that Such acceptance must be free consent and there should not be any chance to coerce the person of Crave out the acceptance illegally. It has been stated under the case law of Donoghue vs Stevenson that in case of any offer there should be acceptance for each and once the offer is accepted the offer has to pay attention to the acceptor. In Wakeling v Ripley[1], it was held that a contract can be legally binding only use there is a valid offer and acceptance to the offer. It has been mentioned under the case law of Riches v Hogbrn[2] it has been held that a party who accept the offer made by the offer should accept the same in such a way or manner that is created by the offer or that is encrypted in the mind of the offeror. In the case of Grauco[3] it has been held that once the person accept all the requirements made by the offer he shall be restricted by Court to claim further. The reason behind the same is that it is presumed when a person give he is ordered free consent over such issue. It is stated under the law that when an offer has been made and the parties who accept the same could not able to add certain extra benefits under the conditions of the offer. If there is certain proof regarding the method that the acceptor has added extra provisions under the contractual rules and if the offeror could not able to understand its meaning and without the understanding he signed the contract then the transaction would not be considered as a valid acceptance or a valid contract. In Chapelton v Bary Urban District Council[4], it was held that there are certain limitation regarding the contractual liability and there is a profession mentioned under the contract law regarding the exclusion clause. The main objective of the exclusion Clause is that is in a contractual agreement there is certain provisions regarding the contract law that are not expected to be there under the control agreement. It is to be understand that if any of the position has made or included or added in the conditions of the contractual agreement it is the duty of the person who has decided search terms brought into the mind of the other party. Is the same principle has not been followed up properly the validity of the contract should not be possible. The relevant case law regarding the exclusion clause can be Causer v Browne[5]. There are certain profession mentioned under the contract law to determine the legality of the legal effect of the contract. It has been mentioned under the act that after the offer is made a person who accept the same, shall be made on the way where there is no classes of coercion and undue influence or fraudulent way. It has also been stated that if the additional term is not known to the parties to the contract or any of the parties to the contract the towns will be excluded from the contractual agreement. In Interphoto Picture Library v StillettoVisual Progrm[6], it has been held that after the contractual agreements and the terms of such agreement has been made no other conditions should be added with the management. If such terms are added it is said violate the principles of contractual law and hills make the contract void. The level of the contract law is very much civil in nature and therefore if any breach has been made regarding the contract act or the conditions of the contractual agreement, the aggrieved party has every right to claim damages from the liable party. In addition to the fact of claiming damage the address party me also sick from the earliest party such compensation then they had to face regarding the addition of the provision. Application In this present Case it is to be seen whether there is a valid offer and acceptance to the matter and whether there is any extra positions added under the contractual agreement or not. It is stated under the fact of the case that one Qantas made a contracting agreement for the period of 545 days. The contract is made under this case for the delivery of certain goods. All the necessary facts of the requirements made clear by the offer and the acceptor had agreed to provide all the requirements and therefore and acceptance has been made regarding the same. It is a common fact that once an offer is getting accepted the contract is formed as legally. It is a fact that after the acceptance of the offer made by the Qantas Airlines, the Airbus company has send a large number of documents and an additional conditions were made by the Airbus company. The Airbus Company has failed to make the first party know about the additional statements and therefore the case extract the profession of the exclusion clause of the contractual law. The requirements made by the Qantas Airlines that the Airbus company will provide them a high quality video entertainment system that must be hold 36 channels and there should be engine of good quality[7]. How was Earth after the contractual sub subject has been prepared and the first party of the contract started to using it has come to the knowledge of the party that the video system can hold 34 channels only and therefore the first party had to face serious monetary injury regarding the same.Therefore, it can be said that the Airbus company is liable under the exclusion clause as it was failed to make the additional provision knowledgeable for the first party and as a result of that the first party had to face severe business injury and therefore the Qantas Airlines can claim damage from the Airbus company for the Loss. The main issue of this case is whether the Frank can make the contract valid regarding the present scenario or not. The case is based on the vicarious liability where the main objective is the principal is liable for the act of the agent. The subject matter of the case attracts the principle of law of agency. Certain principles of miss representation of facts are also attracted in this case. It is a common principle that if a contract is made based on certain false statement Ben the law restrict the parties and invalidate the contract on the basis of misrepresentation of fact. The case regarding the misrepresentation has been proved in Eddington v Fitzmaurice[8]. The term miss representation of fact is differed from the puffery regarding the nature and character. In case of puffery, certain self exaggeration has been made and they have no legal significance as decided by the court in Dimmock v Hallet[9]. On the other hand miss representation can be take place in the contract where the contract is made based on false statement. Misrepresentation takes place well the other party to whom the misrepresented facts are delivered accept the same with a believe that the outcome of the facts will be beneficiary for him. A party that certain facts on Mr presented to them has decided it in the case of Hill versus Rose that it is enough to establish the fact and they had relied upon the misrepresented facts. In Lockhart v Osman[10] it was decided that a claim for misrepresentation can only be made one the other party did not know about the true nature of the statement and the decision to accept the or misrepresented fact is not affected by the prior knowledge regarding the facts. The miss representation of fat helps the intending party to induce the other party in the contract and cheat them by involving their names in the contractual agreement. However it is to be bored in mind that Silence could not be taken as an acceptance to the representation of business development. In Derry v Peek[11], it was held at fraudulent misrepresentation is made when the party who accepts then is represented facts knew the outcome of the facts and after knowing the facts they have not made any prudent decision or steps and sign the contract civil agreement based on the misrepresented facts. It is to be decided by the court that in case of fraudulent misrepresentation the party cannot claim any damage for their loss. The second problem regarding the case is based on the principle of agency. Certain exception present under the law of contract regarding the liability of the principal for the acts of the agent. The principal is known as the Vicarious liability. The case was established in the Pioneer Mortgage v Colombus Capital Pty Ltd[12]. The case is divided into two parts- at the first part, Gemma is a sales person and attempt to sell the dishware to one of her relative. The price that were fixed for the same $350. However, she had misrepresented the fact to the owner of the shop and told him that customer does not agree to pay more than $300. Believe the fact, Frank, the owner, agreed to sell the dishwasher at a price of $300. Later on, however, he came to know that there are customers who will pay $350 for the dishwasher. Therefore, in this case, Gemma misrepresented Frank and he can claim damage from her. In the second case, Bob was an employee under Frank and during his work, Bob had done something wrong and Frank suspended him for the same. after fired from the job, Bob sold 10 washing machine to Angela. Angela paid the money through online and then Bob fled away. When Angela asked for the machine, Frank told that Bob do not work there anymore. Conclusion: It either is to be stated that the principle of vicarious liability will apply here and Frank has to pay Angela the money or has to hand over the machine. Frank is bounded by the contract made between Bob and Angela. 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