Sample Essay on:
The Reasons for Under Pricing in Initial Public Offerings

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Essay / Research Paper Abstract

There is a great deal of empirical evidence that shows initial public offerings (IPO’s), are usually under priced. This well written 8 page paper examines why this occurs with reference to numerous studies and theories. The bibliography cites 13 sources.

Page Count:

8 pages (~225 words per page)

File: TS14_TEIPOund.rtf

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Unformatted sample text from the term paper:

a global phenomena that is supported by a wealth of empirical evidence. The research into why this occurs is diverse with many theories being postulated. On close inspection of these theories there are commonalities such as the asymmetry of information and the role or reputation of the underwriter (Aggarwal et al, 2002, Chishty, 1996). The level of under pricing tends to vary, however, it has been noted by several studies that this averages above 10% in most markets when the issue price is compared with the closing price on the first day of trading, there are also recorded incidents where the under valuation was as much as 45% - 50% (Aggarwal et al, 2002). The phenomena of asymmetry of information is generally accepted as a factor in most commercial investments. Baron (1982) saw this as the key to the use of discounted IPO pricing to be used as an incentive to create a market to purchase the shares. His theory was that the investment banking putting the offer together will have a much greater level of knowledge about the company than the investor. As the investment bank will gain their remuneration from the sale of the shares and as such this discount price also serves to ensure that the investment bank put sufficient time and effort into the launch of the shares (Baron, 1982). This is a controversial model, as studies have also indicated that this may not be correct, and as such contradictory evidence exists (Muscarella and Vetsuypens, 1989). In this is was found that the under pricing takes pace with launches by investment banks, but the aspect of asymmetry of information was divergent, with lower levels found as the insurers of the issues were acting ads their ...

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