IPO Underpricing: A Case Study
Chapter 1 Introduction
1.1 Background
Going public is one of the equity financing, which refers to the sale of ownership interest to raise funds for business purposes. This grants the public equity capital access and may lower the company’s cost of funding from operations and investments.
Companies can go public by Initial Public Offerings (IPO) of shares to investors. IPO refers to the first sale of stock by company to the public. It distinguishes from Season Equity Offering (SEO) in which the latter means new equity (shares) issued by an existing public traded company. Though going public has abovementioned benefits, the process of IPO issuance is costly. Comparing the 3 external capital raising methods: IPO, SEO and bond issuance with
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Ibbotson (1975) found an average initial performance of IPO of 11.4% using sample in 1960s. On other hand, with IPO listing on 1975, 1959 and 1963, Stoll and Curley (1970) found an average underpricing of as high as 75%. From 1977 to 1982, the IPO was discounted for 16.3%, but has increased to 48.4% during the following 15 months period of 1980 to 1981 (Ritter, 1980). Ritter categorized the former as “cold issue” market, while the latter as “hot issue” market. Ritter and Welch (2002) continued the study by covering 1980 to 2001 and discovered an average of 18.8% of positive return of IPO in their first trading day. The extent of underpricing varied across different sample periods …show more content…
Yong and Isa (2003) studied the IPO initial return between 1980 to 1998 recorded that the average initial returns of IPO in Malaysia was 104.1% making it the second highest IPO Underpricing after China as compared with 38 other countries as compiled by Loughran et. al (2006). A more recent study by Abdul Rahim and Yong (2010) showed an average initial return of 31.99 percent from 1999 to
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