Most IPOs are made through firms that act as ‘‘firm commitment’’ underwriters for the company’s stock, which means that the company does not sell shares to the public directly but rather sells the shares to the underwriters at a negotiated discount to the price at which the shares will be offered to the public. The underwriters then resell the shares to dealers and to their institutional and retail customers. To help ensure a diversified, successful distribution of stock, a selling group of underwriters is usually formed, typically consisting of twenty to thirty members. The core of the selling group is the underwriting syndicate, a group of firms that, in a firm commitment underwriting, is assembled in order to spread the financial risk of purchasing the shares and reselling them to the public.
Historically, the reputation of the research analyst in the prospective manager’s investment banking firm has been a significant factor for companies selecting a managing underwriter because the coverage provided by a well respected research analyst can be critical to maintaining investor interest. The company should evaluate the prospective manager’s selling and distribution capabilities. Does the
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underwriter have a history of effectively selling IPOs and does it generally assemble quality syndicates?
Previous studies have shown that the IPOs of common stock yield positive short-run raw returns, according to Rock (1986), Jog and Riding (1987), Tinic (1988), Finn and Higham (1988), Carter, Dark and Singh (1998), documented that there are significant differences in the long-run stock returns of IPOs based on the reputation measure of the lead underwriter. That is, IPOs underwritten by higher reputation investment banks have higher long-run returns than those underwritten by less prestigious and less established investment banks. Firms taken public by more prestigious underwriters are associated with higher IPO return.
=> H1: Underwriter is positively related to the IPO return.
2.4.2. Firm size (Total asset of the year prior to IPO)
Total assets is the total value of all assets of the company at the time of reporting. To control for the effect of firm size, Michael B.Heeley, Sharon F.
Matusik, and Neelam Jain (2007) included logged firm assets in the year prior to IPO. It was important to account for firm size to insure that their patent stock measure reflected the innovation output of a firm and not firm size; larger firms in general have more patents. In addition, an increase in firm size lowers underpricing because of reduced information asymmetry about the viability of the firm. So the IPO return will higher.
According to Vichakorn Chiraphadhanakul, Kennedy D Gunawardana
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(2005), Firm size of listed companies coming under financial industry Industrial sector in Bangkok stock market have positive relationship with IPO return.
=> H2: Firm size is positively related to IPO return.
2.4.3. Leverage of the year prior to IPO
Financial leverage occurs when the company decided to finance most of its assets with debt. Companies do this only when the demand for investment capital of the enterprise is high but not enough equity to finance. Corporate loan becomes payable debt, interest is calculated based on this principal.
The impacts affecting the value of the company will be smaller if the securities issued is less risky. This implies that there is a hierarchy as follows:
capital structure will be affected when a company sponsors a new project: The first impact is the impact within the company then the debts and finally the capital. In this model, high leverage can bring positive information to investors about the value of the company. Ross (1977), John (1987), Noe (1988), Heinkel and Zechner (1990), Harris and Raviv (1990), and Nachman and Noe (1994) proposed the kind of capital structure in the model by which the leverage effect can transmit information to the market. When a company used a relatively high debt in its capital structure, it increasingly concerned about the use of high leverage.
Greater leverage before IPO will carry a reliable message on the company's reputation as the use of debt (the threat from the inability to pay debts led to bankruptcy) becomes relatively large burden for the business owners, limiting the ability to control the company's cash flow is relatively large and it increases
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the risk to the company's shares. The company has a low value will restrict the use of more debt because they do not want to fall into the state can not afford to pay and eventually led to bankruptcy.
=> H3: Leverage is negatively related to the IPO return.
2.4.4. AGE (number of years from founding to the year prior to IPO)
I included a measure of firm age, measured as years since founding to the year prior to IPO. In general, more public information is available about the value of older firms, which can reduce information asymmetries. This reduction in asymmetry suggests that there will be a negative relationship between firm age and underpricing (Michael B.Heeley, Sharon F. Matusik, and Neelam Jain, 2007).
Firms going public, especially young growth firms, face a market that is subject to sharp swings in valuations. The fact that the issuing firm is subject to the whims of the market makes the IPO process a high-stress period for entrepreneurs.
=> H4: AGE is positively related to IPO return.
2.4.5. State ownership (percentage of state ownership after IPO)
To take the possible impact of ownership concentration into account, Nancy Huyghebaert and Cynthia Van Hulle (2000) add a variable measuring the ownership percentage of block holders owning at least 5% of the shares.
Furthermore, to control for the fact that the absolute amount of adverse selection costs may increase with the size of the firm, they also included an interaction term between ownership concentration and firm size.
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=> H5: State ownership is positively related to the IPO return 2.4.6. Volume of IPO (Number of shares offered when IPO)
Nuray Guner, Zeynep Onder, Seza Danisoglu Rhoades (2000) studied that the relationship between the volume of IPOs and the initial day IPO returns is negative.
IPO underpricing is negatively related to offering size, proportion of tradable shares, according to Z. Jun Lin, Zhimin Tian (2012).
=> H6: Volume of IPO is negatively related to IPO return.