IPO underpricing Essay Example | Topics and Well Written Essays - 500 words

IPO underpricing - Essay Example Many companies have a tendency of having underpriced IPOs so that potential investors can be attracted into them. Investors find it easier to influence the shares’ price with low offering price as their intention is to obtain the windfall gain in the period of issuing. Low-priced shares generally have a lot of capacity for share increase of price on the basis of market demand forces. As a result, low offering price signifies considerable share underpricing. IPO underpricing has been explained with the offering size of a company for a long time, which is consistent with the ex ante uncertainty theory. This concept reflects in the works of Beatty and Ritter (1986) as well as in McGuinness (1992). Tu and TSE (2006), in their analysis of the Chinese A-share market, state the size of offering as a critical determinant of the IPO underpricing. A company’s offering size is calculated through multiplication of the offer price with the offered number of shares. The equation for this is, size of offering = number of offered shares x price of offering. There is a perception that companies having bigger offerings’ size have superior management and control and are more mature as compared to the companies having smaller offering magnitudes. Bigger companies derive their tendency to underprice their shares from the fact that their information flow is relatively better than that of the smaller companies, that are more influenced by the a symmetry of information. Data used in this project was retrieved from the official website of Shanghai Stock Exchange (available at http://www.sse.com.cn) and also from the GTA Database. Like discussed before, there are five groups of shares in the Chinese stock market. However, it is just the A-share stocks that are completely quoted in Yuan. Many companies have a preference for being included in the Shanghai Stock Exchange instead of the Shenzhen Stock Exchange in spite of