Upload
calvin
View
91
Download
0
Tags:
Embed Size (px)
DESCRIPTION
“Why New Issue are Underpriced?” and “IPO and Underwriter Reputation”. Diniloisvina Sumsun Gezy Megalitta Novy Yana. Why New Issue are Underpriced?. Kevin ROCK Journal of Financial Economics 1986. Introduction. Introduction. Model Assumption. Demand for New Issue. - PowerPoint PPT Presentation
Citation preview
“Why New Issue are Underpriced?” and
“IPO and Underwriter Reputation”
Diniloisvina Sumsun
Gezy Megalitta
Novy Yana
Why New Issue are Underpriced?
Kevin ROCK
Journal of Financial Economics
1986
Introduction
Introduction
Model Assumption
Demand for New Issue
Implication-Uninformed Investor
Implication-Uninformed Investor
Implication-Issuer
Conslusion
Initial Public Offerings and Underwriter Reputation
Richard Carter, Steven Manaster
Journal of Finance
1990
Literature Review
IPO returns are required by uninformed investors as compensation for the risk of trading against superior information (Rock, 1986)
Empirical regulity of IPO underpricing (Louge 1973; Ibboston 1975; Miller and Reilly 1987)
Research Question
What is the correlation between prestigious underwriter with low risk offering?
Main Result
Prestigious underwriter are associated with lower risk offerings
With less risk there is less intensive to acquire information and fewer informed investors
Consequently, prestigious underwriter are assosiated with IPO that have lower returns
Model Assumption
A1 There are three time periods
Time Period Event
0 Issuing firm contract with marketing underwriters to sell their IPO on a “firm commitment” basis in the primary market
1 The underwriter sells the IPO in the primary market
2 The shares of the IPO trade in secondary market
A2 There are two markets, a primary market and a secondary marketA3 Differences in issuing firmsA4 Investor are risk neutralA5 Informed investors, do not have sufficient wealthA6 All IPO are oversubscribeA7 Critical for the model’s development, in the nature of the asymmetric information in the primary market
Empirical test for the model
A. Investor’s Choice
Empirical test for the model
Empirical test for the model
B. The Uncertain and Underwriter Reputation
Empirical test for the model
C. The matching of Underwriters and Issuing Firm
The foregoing model predicts that the price run-up for issuing firms will be less for underwriters with greater prestige. Implicit in the model is the supposition that investment banking firms choose to develop reputations and that issuing firms will employ underwriters with a reputation appropriate for the a level of their IPO. Reputation development and maintenance are exogenous to our model. In this section, we provide an intuitive explanation of the role played by reputation in the matching of investment bankers and issuing firms.
DATA
Data Description
The Underwriter Reputation Variable
Methods and Result
Hypothesis Tests : The Variance of Possible Firm Values
Hypothesis Test : Price Run-Up
Summary and Conclusion
We have presented an empirically testable model of initial public offerings of equity. The model is consistent with the work of Rock (1986). He argued that IPO price run-up compensates uninformed investors for the risk of trading against superior information. The extend this theory to suggest that the greater the proportion of informed capital participating in an IPO, the greater theequilibrium price run-up. Because investors have scarce resources to invest in information acquisition, they will specialize in acquiring information for the most risky investments. With a migration of informed capital to the IPOs with the largest dispersion in possible secondary market values, these will experience the greatest price run-up.
Thank you
for your attention