Ipo Underpricing Essay

IPO underpricing: Determinants of first-day IPO returns for Emerging growth firms in US

Introduction

It has been widely recognized that the presence of emerging growth firms is crucial to an economy. These firms not only kindle competition, innovation and knowledge spillover in the economy but also create jobs and are more likely to offer better salary and benefits. They also tend to generate more value and profits but are less prone to failure compared with small businesses. In addition, they are more likely to export products and services while producing higher productivity due to investment in research and development. (Coopers and Lybrand, 1988) In the case of the United States, the rise of these companies claimed America’s economic

The most well-known and widely explained models on underpricing is based on asymmetric information among investors. These include the winner’s curse hypothesis, Information Revelation Theories, Principal-Agent Models and underpricing as a signal of firm quality. Others are based on institutional reasons such as legal liability and behavioral explanations like investor sentiment (Ljungqvist, 2004). Theories that may potentially be specific to emerging growth firms, which tend to be lesser known, are the ones based on valuation risk and underpricing as publicity stance. Firms that are less known or could not indicate a long history of profitability may usually be underpriced due to unpredictable risk associated in valuation (Damodaran, 2009). Some argue that by deliberately underpricing the IPO, the issuing companies, attract publicity and gain better reputation (Fitza, 2010). Due to its internal and external unpredictabilities surrounding IPO underpricing, the topic remains an interesting subject among

When it comes to emerging growth firms, its business model and venture capital networks are frequently researched instead of its performances in the financial market or economic development policy. Possible reasons include the term emerging growth being relatively new and that there are several disparities of the term. In addition, accessing these companies’ information and prior supposition have contributed to forming a lack of empirical based research on the subject. (Buss,