(TIỂU LUẬN) title the impact of IPO underpricing and its connection with information asymmetry

BAFI3182 FINANCIAL MARKETS Title: The Impact of IPO Underpricing and Its Connection with Information Asymmetry Lecturer Nguyen Thi My Linh Student Name Student ID Part A: 1901 words Word Count Part B: 502 words Date of Submission 16 September 2021 I declare that in submitting all work for this assessment I have read, understood and agree to the content and expectations of the Assessment declaration TABLE OF CONTENTS PART A: RESEARCH PAPER I II III IV V ABSTRACT INTRODUCTION LITERATURE REVIEWS IPO BACKGROUND .4 IPO UNDERPRICING INFORMATION ASYMMETRIC LIMITATIONS CONCLUSION .8 PART B: REFLECTION ON THE INDUSTRY TALK REFERENCE LIST: 11 PART A: RESEARCH PAPER I ABSTRACT This paper conducts a general review of Initial Public Offerings (IPO), including its strengths and disadvantages Aside from that, a thorough study of the factor causing underpricing in IPO which is the asymmetrical in information, has been carried out based on the foundation of numerous researches and theoretical findings Furthermore, some of the advantages that have emerged from underpricing behavior have been identified with an effort to assist in the issue clarification II INTRODUCTION The implementation of the Initial Public Offering (IPO) method of raising capital or acquiring investment is a breakthrough step in the evolution of any growing firm When the company requires large amount of fund to maintain in the emerging market, the founders' contributions might not be adequate, also they could not be able to acquire loans with such a valid assurance of paying a reasonable interest rate (Bruton, Chahine & Filatotchev 2009) To circumvent this, the most preferable method is to obtain public equity funding For instance, the self-PR campaign is a gem in the business's hat, and the consequent attention may result in indirect benefits including increased recruiting capabilities of skilled worker and leaders, and boosted company's reputation, etc (Agoraki, Gounopoulos & Kouretas 2021) The company's shares are later valued based on a variety of factors, both related and uncorrelated, that can impact the market demand and supply trend on the trading floor Based on research conduct by Judge et al (2015), underpricing in IPO is widely regarded to be a widespread problem across the globe This approach entails a negative gap between the bid and the first listing day's closing price, as well as the estimated initial return rate (Filatotchev & Bishop 2002) For many years, underpricing of initial public offerings has been a fascinating research topic for economists Thus, many theories have been established to explain this behavior, including theories of information asymmetry, business ownership and manage, institutional variables, and behavioral finance (Lee, Taylor & Walter 1999) This paper would provide an overview of Initial Public Offering; as well as identify, analyze and evaluate IPO factors and variables that highlighted the impact of underpricing on business, and connect it to the information asymmetry factor using the foundation of numerous researches and theoretical findings III LITERATURE REVIEWS IPO BACKGROUND According to Mrzygłod and Nowak (2013), the Initial Public Offering is a process through which shares of the company are offered in the marketplace through the trading floor of stock exchange The most suitable approach is to collect funds via public equity For instance, Venture Capitalists (VC) was given the opportunity to increase their funds raising and obtain financial gains via this method (Wang & Wan 2013) Based on research conducted by Arend, Patel and Park (2014), there are many reasons for a business to choose IPO approach Ultimately, the goal is to acquire additional funds in order to ensure the continued growth of the company, the operations expansion, investment project execution, company development and innovation, market expansion, and an increase in the overall value of the company over time Additionally, the IPO improves a company's image, which also increases its chances of receiving funds from financial institutions, and allows additional income in the event of adverse outcomes (Morricone et al 2017) Apart from these advantages, there are also disadvantages to an IPO approach One of these disadvantages is the need to provide financial information not only at the initial listing, but also on a regular basis during the time that the organization’s shares is publicly traded on the stock exchange trading floor (Yan et al 2019) Moreover, the selling of a company's shares may negatively impact a founder's authority (Chahine, Filatotchev & Zahra 2011) As part of the preparation for the business to operate as a public corporation, a good amount of operational expenses is needed, including for an increased in marketing expenses and a continuous expenditure of preparation (Duong et al 2021) After examining a great amount of initial public offering on multination’s stock exchange floor, the perks of this capital acquisition path exceed any drawbacks, which leaves only one urgent issues being the price to set for the first proposition (Bruton et al 2010) IPO UNDERPRICING Companies that issued their shares on the stock trading floor could entice and encourage new stakeholder Likewise, in order to attract investors, it is common for companies to offer shares at a price that are cheaper than the actual value Such tactic is known as underpricing An Initial Public Offering (IPO) may be purposefully underpriced in order to increase demand and persuade investors to take a chance on a new business It's possible that the stock was underpriced by mistake as a result of the underwriters' underestimation of the demand for the firm's stock in the market (Zou et al 2020) The initial stock launch mirrors the value of the company’s stock in the marketplace which the business is unable to obtain when the shares are first made available for purchase Therefore, the IPO underpricing is a matter of serious concern for just about any entrepreneurial company, as well as the entrepreneur (Judge et al 2015) Underpricing was described as “money left on the table by the business” (Goergen, Gounopoulos and Koutroumpis 2021), resulting in a reduction in the financial obtains from the initial public offering Additionally, underpricing is viewed as an opportunity loss for businesses, because the investments that the business received are governed by the bid price of the issuance The greater the offer, the more money received for a given number of issued shares However, it is predicted that businesses with a larger degree of IPO underpricing would attain higher growth rates (Filatotchev & Bishop 2002) ASYMMETRIC INFORMATION Numerous studies support the above notion and argue that an IPO's price should be linked to the asymmetric information surrounding the business Based on research conducted by Cai, Helwege and Warga (2007), a firm that experienced asymmetric of information would have had a higher tendency to produce underpricing of IPO It is a projection that has received substantial empirical support since its publication Various researchers also indicated that information asymmetry could compromised the precision of the pricing process (Hoque 2014; Fohlin 2010; Duong et al 2021) Furthermore, it would be difficult to evaluate the value of a business accurately when it is characterized by significant information failure, because companies with a greater level of uncertainty ought to have a greater level of initial return volatility (Officer, Lowry & Schwert 2010) According to Fohlin (2010), the asymmetric information theoretical key tenet implied that participants to an initial public offering have multiple level of information asymmetry, with the asymmetric information concept being positively correlated to the underpricing of IPO Additionally, the winner's curse theory indicated that issuers are unable to forecast their aftermarket share price (Hendricks, Porter & Tan 2008) Not only that, Cai, He and He (2010) found that the trade initiated by the institutional investor are better informed than by the individual investment companies Therefore, large financial organizations would only invest their money in an offer that has a high return rate or profit on the investment, while individual would make their investment decisions despite the quality or value of the shares Moreover, the business must issue shares at a discounted offer in order to attract the attention of investors who are not well-informed Funaoka and Nishimura (2019) argues that issuing businesses with better performance are utilizing underpricing of IPO for the gathering of information in order to compensate for the investors that experienced information asymmetry Correspondingly, asymmetric of information theory among businesses, investors, issuers, and underwriters have been established based on the concept of asymmetric information (Sufi 2007) It is believed that there is an asymmetric information concerning the issuer and the underwriter (Zou et al 2020) Since the party or company with more experience and better informed is responsible for organizing the IPO, it is preferable to estimate capital market demand in order to accurately evaluate the worth of the issuer's shares Overall, the final decision for the price remain in the hand of the issuer, which implies that there is a solid correlation between the issuer's concern and the potential demand for the offer (Su & Bangassa 2011) According to Liu et al (2020), the uncertainty regarding the value of Initial public offerings contributes to the underpricing of IPO because there is an asymmetry of information exist among the issuer and the investor In term of recognizing the value of IPO, the issuer is the one knowing of the real worth of the company initial public offering and not the investors As a result, investors would rather choose to purchase stock with the company that offered lower price to cover for the uncertainty caused by information asymmetry As for the issuers part, in order to attract those uninformed individuals’ investment, they should establish a lower price than the real value of their share Base on the above finding, a greater degree of uncertainty in initial public offerings is expected to occur in greater underpricing (Boulton, Smart & Zutter 2010) Correspondingly, investment banks or financial service companies also apply the concept of underpricing to lower expenses, reduce risks, raise reputation and gain investors trust and favor (Yu, Gul & Radhakrishnan 2014 Investors aim to avoid circumstances in which their potential returns are adjusted or decreased The offered share price is less than the anticipated market value of the share, which is intentionally set by the issuers to guarantee investors a good initial return However, additional problems will inevitably arise and yield greater returns since there were no specific conditions (Keefe & Gallagher 2014) In addition, due to the asymmetry of information regarding start up businesses, Bansal and Khanna (2013) found that underpricing would be widely adopted and pricing precision would be lowered; which indicate that their anticipation would be higher and the dispersion of expected early returns would be larger than the former businesses in the marketplace IV LIMITATIONS The Initial Public Offering (IPO) is a watershed in the history of any business IPO has become a popular study subject for many academics and industry professionals alike (Derrien 2005; Mumtaz & Yoshino 2021) When examining the relevant IPO underpricing driver, especially the information asymmetry, I was undoubtedly constrained by the wide range of research articles available Since the underpricing phenomenon of initial public offerings (IPOs) and the elements that influence it are indeed a broad subject, thus I was unable to cover all of the angles and factors in my paper I was only able to highlighted one main cause which is information asymmetry Certain theories are based on objective judgements, and they may not be entirely correct in some instances because of the presence of refute articles There are several additional factors that contribute to IPO underpricing that are not included in this study; however, they were not included because of their lack of credibility and popularity, and the emergence of many publications to invalidated them Furthermore, since this study take into account the international stock market, it may not be applicable to any situations that occur infrequently, nor to nations that have distinct laws and policies governing the stock market V CONCLUSION Entrepreneurs may benefit from their first significant access to cash from their resources and effort invested in company via an initial public offering (IPO) It is proven that companies often undervalue their first public offering The research study has focused on IPO underpricing, with the purpose of formulating the underlying cause of this phenomena which is information asymmetry Base on the various findings of prior studies on underpricing, the information asymmetry between various participants in the listing process, including the IPO firms, financial institutions, underwriters, and investors of the company, are considered Additionally, certain perspective of some parties regarding pricing behavior was revealed when they were offered particular benefits PART B: REFLECTION ON THE INDUSTRY TALK The speech was delivered by our guess speaker, Mr Thach He went over an overview of personal wealth management plan The discussion of the talk was about the definition of personal financial saving plan It was answered through the definition of financial aspect, security and wellness Basically, in order to come up with a financial plan, people could have done it through personal saving or investment The term financial security and wellness is quite similar, but financial security cared more about the requirement of money to support a personal lifestyle; whereas, financial wellness tends to focus on how to manage a person financial and economic life effectively Afterward, Mr Thach then go in more detail of how to come up with a plan; in what timeline should people start to focus on financial plan; and the various options of investment The thing that fascinated me most about his speech is how Mr Thach was able to provide various type of investments and a full detail of the stock market First, he went over an overall definition and few key details of the stock, gold, forex commodity, and real estate market Those terms are all familiar me since I have been learning about them in our Financial Market couse which made it easier for me to follow his speech From what I have learned, all the markets come with benefits and risks that is unpredictable Thus it is crucial that people must have an indept knowledge of the term before making any decision of investment According to Mr Thach, the stock market is the one that can provide investor with the most benefits or lost It is one of the riskiest market to invest in The P/E ratio that shown on the stock exchange floor is only a reflection of a firm past behavior, and the price is what the investors expected of the firm’s value to be in the future Therefore, investors must be extremely conscious of those term and avoid getting mixed up between them to prevent an extreme lost Again, all markets come with a risk and benefit, Mr Thach recommended that investors should only invest when they have enough knowledge, within a limit and not go overboard with your financially set limit since it could potentially ruin your life and financial saving plan In conclusion, the speech has provided me with an incentive of how to manage my personal financial saving, what are my options to expand my financial capacity to achieve a financial wellness and enjoying my life to the fullness I believe through the speech of Mr Thach, and the Financial Market course, I have the fundamental knowledge to manage my personal financial plan and to make investment decision However, I am currently interested in the cryptocurrency market; 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New evidence from China's SME market’, Applied Economics, vol 52, no 23, pp 2493-2507, viewed September 2021, Taylor&Francis Online database 13 ... contributes to the underpricing of IPO because there is an asymmetry of information exist among the issuer and the investor In term of recognizing the value of IPO, the issuer is the one knowing of the. .. public offering have multiple level of information asymmetry, with the asymmetric information concept being positively correlated to the underpricing of IPO Additionally, the winner''s curse theory... identify, analyze and evaluate IPO factors and variables that highlighted the impact of underpricing on business, and connect it to the information asymmetry factor using the foundation of numerous