Finance Essay Example | Topics and Well Written Essays - 2500 words

Finance - Essay ExampleAnalysis of Short-run initial public tolerateing under Pricing Phenomenon in Australian Stock Market The phenomenon of under pricing of Initial Public Offer (IPO) is a good deal considered as an anomaly that is mostly visible in the primary marketplaces throughout the world. But the degree or achievement of under pricing varies from country to country and further from sector to sector. Under pricing is defined as the phenomenon when the offer set of a new issue is lower than the price of early trade. It is calculated as difference close price on the date of listing and offer price of issue verbalised as percentage of offer price of issue. In the US market, the short run under-pricing is a tumesce known phenomenon but in order to investigate whether this phenomenon exists in the Australian computer storage markets or not the researcher will have to measure the short-run IPO performance by analysing the returns of IPOs that were listed between elect tim e frame and remained listed up to at least 2 year leting period (Rhee, 2002, pp.1-7). By carefully analysing the IPO data of Australian inventory markets since 2011, with special reference to the issue price of IPO shares and the last job close price of the IPO stocks at the end of first day of trading after listing, it can be said that short-run IPO under-pricing phenomenon does exist in Australian stock markets. This is because the issue price of the IPO stocks were significantly underpriced compared to last trading price at the end of first of trading after IPO and listing. A careful analysis of IPO under pricing reveals that when the offer price of new issue is lower than first trading price after listing, then the stock is considered to be under priced. Now, a stock should generally be under priced when there is lack of pick up in the market and that the phenomenon should be temporary since under pricing will eventually motivate investors to hold shares which will increase the demand for the shares and thus will consequently increase the price of shares (Bansal and Khanna, 2012, pp.107-108). But, in racing shell of IPO under pricing in US market or Australian stock markets, it is often believed that IPOs are under priced on concerns of uncertainty and liquidity regarding the level of probable trade in the market after listing. Hence, in general any stock which is expected to be less(prenominal) liquid and less predictable will be under priced to greater extent for two primary solid grounds. The first reason is to compensate the investor for taking risk of holding the stock and secondly increase the liquidity of trading. The general score for such phenomenon is that since the issuing entity tends to have more knowledge regarding the stocks and their values compared to investors, the company must under price the stocks to motivate investors to participate in the IPO (Ritter, 1995, pp.1-4). When the firms issue their shares to public through IPO they incur some(prenominal) direct and direct costs. The direct cost includes underwriting fee, registration, legal, and audit fees. The indirect cost includes cost associated with under pricing. In the calculation of under pricing, the first days closing price represents investor expectation regarding what they are unforced to pay for holding the firm