Investigating The Initial Return Of Nonfinancial Initial Public Offerings?

Investigating The Initial Return Of Nonfinancial Initial Public Offerings?

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The primary aim of this report is to critically investigate the initial return of nonfinancial Initial Public Offerings (IPOs) that went public on the London Alternative Investment Market (AIM) between the period of January 2005 and December 2014. An IPO is an offering of shares to the public, where new shares are sold to raise cash for the firm (Allen, F., Brealey, R and Myers, S (2010)) The market attracts mainly small and medium companies because the listing requirements are less restrictive than the London Stock Exchange (LSE). Underpricing is calculated using the formula below:
Underpricing=((First day closing price - Offer price))/(Offer Price) x 100

However, underwriters may advice issuing firms to underprice issues to make a good first impression in the Stock Exchange and more retail investors could be attracted to diversify ownership as a form of takeover defence. A research paper written by Rock (1986) closely examined asymmetric information between two experimental groups namely the informed and uninformed investor. He found that uninformed investors are more likely to invest in overpriced issues as they cannot differentiate between the risky and less risky firms. Therefore, underpricing would increase the demand for the share issues by uninformed investors, by increasing their participation through offering higher discounts on shares. This could mean underpricing could lead to an increase in the short-term efficiency of shares, allowing investors to make abnormal returns, which may be linked to long-term underperformance.

Explanatory Variables Explanation:
There have been numerous finance literatures such as Agathee, Brooks and Sannassee (2012) , including international studies ascertained with the objective of d...


... middle of paper ...


...eved before the offering. Miller (1977) predicts that the prices of the shares can deviate from their intrinsic value further based on optimism of the investors. Investors are more likely to invest in shares with higher total revenue before the offering as it provides an optimist view on the company’s sales performance. Therefore, we estimate that it can be positive related with the short-term underpricing.
Deal size ($ million):
This variable is calculated using the formula below:
=offer price x no.of shares
Cornelli et al (2006) find that the total transaction volume of the new issues is positively correlated with individual measures of investor behaviour. Underwriters take advantage of investor sentiments when setting the offer price. We estimate that the deal size could positively impact investor sentiments and therefore increase the magnitude of underpricing.

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