Bhagwan And Sherman's Theory Of Underpricing

Chowdhry, Bhagwan & Sherman. (1996) use the case of information leakage to explain the causes of underpricing. They examined the differences between oversubscription and underpricing by comparing US and UK style IPOs. They argue that the reason for the reducing cost of underprising is due to the interest earned on the subscription funds and therefore induce issuers to underprice more. From this point of view, they conclude that in the periods when interest rates are high, the underpricing is higher also. Using data from 431 IPOs during January 1986 - December 1998, Johnston & Madura (2003) examined the effect of interest rate on initial return of financial institutions engaged in IPOs. The ordinary least squares (OLS) regression results suggest

Company size
Salas/revenue
Habib, M. & Ljungqvist, A. (2000) used the natural log of sales as a measure of firm size. Younger and smaller companies are more underpriced because they are riskier. (Ritter, 1984); (Ritter, 1991); (Megginson & Weiss, 1991). Bortolon, P. & Junior, A. (2015) used average of the logarithm of revenue to measure the size of the firm. Michelsen & Klein (2011) argue that the variable company size acts as a vital role whether to go private or not. According to the authors, when compared to large corporations, the chances for the small and mid-sized companies to experience undervaluation of their assets is higher, and they are more prone to delisting. The increasing of the information asymmetry that determines company’s undervaluation, and, as a result, attractiveness of delisting. This is because small and mid-sized companies produce information less visible and less interesting to market agents. The liquidity of its shares and the company’s assessment is influenced by the company size, this is because the smaller the company, the smaller the amount of information generated and disclosed to the market; the lesser attention given to it by the market; less

(1986) suggests that information asymmetry between issuers and potential investors is the reason of underpricing, therefore in order to attract investors, a discount price is offered. Beatty, R. & Ritter, J. (1986) indicate that firms that have more uncertainties will experience a higher level of underpricing. A higher degree of underpricing is necessary to attract investment from the investors if managers have better information than potential investors. This argument is further supported by Rock (1986) that a higher level of underpricing as compensation for lack of information obtained are given to uninformed investors. Therefore, the investors’ behavior and also the capital raising strategy of a firm is affected by the availability of information. Furthermore, as argued by Chan, Y. (1983) that investors’behavior determine the level of capital the issuing firm wishes to raise, which in turn, is influenced by the availability of