Chapter 1 Introduction I had other topic in my mind for research study which can provide me the knowledge in dynamic finance industry, but I found this topic is interested which can give me good knowledge and good understanding of the initial public offers. In this section of the study, the research will provide an introduction and background, of this thesis. This report is based on random 30th UK IPO’s companies during the period of 2002 to 2007. In this report, we try to find out whether IPOs are under priced or over priced after initial public offer and cover efficient market hypothesis. This study focused on performance of IPOs after issuing. This is the core element of any company. Lots of companies decided to go publicly first time to raise the fund, but the price matter is very important for any companies who announced IPO’s first time publicly. Companies always go to right people to write the IPOs price which should be under priced, so that companies can get good result throughout of the market. When companies decided to go publicly first time, typically price must be below which success on their first day or month of trading, which giving for investor large positive returns (for international evidence of this phenomenon see Ibbotson and Ritter, 1995: Loughran, Ritter and Rydqvist, 1994). That is the reason price always is set below, or the investors systematically overvalue IPO’s on the first trading day. There are few evidence indicate about the market efficiency (Ibbotson 1975). IPOs always be under priced because of the positive initial return can be attributed to a downward bias in the offering price. There is no such explanation exist about the under pricing, though various theories based on different rationales shed light on the factors that may be influential. First information asymmetry (Baron,1982; Rock, 1986), second signaling (Allen and Faulhaber, 1989; Grinblatt and Hwang, 1989; Welch, 1989; Benveniste and Spindt, 1989), third legal liability and litigation risk (Tinic, 1988; Hughes and Thakor, 1992) and finally information cascade effects (Welch, 1992). It is argued in Baron’s information asymmetry theory, that underwriters are well informed about the IPO’s share rather than issuers. If the writer are well informed about the market then it can provide the below price for the market. Although, there are numerous paper available about the price behaviors and performance of the initial public offer. But In this paper based on the difference kind of IPO mixed together and investigate the abnormal price behaviors of initial public offer. In order to do so we show empirical research this belongs to only specific initial offer like property market, and show the various differences about performance of the IPO’s market. This project is important in terms of relationship between issuers, underwriters and investors point of view. According to my data analysis and academic empirical research, would provide me the knowledge of IPOs. 1.1: Scheme of study: The scheme of the study has been organized in different chapters. What the research will be doing in each and every chapter is discussed here shortly. Chapter 1 includes an introduction about the IPO’s price behavior and the performance after the trading. This chapter shows the basic structure of this dissertation. Chapter 2 deals with literature review of the research question in detail. In this chapter the views of the different authors and analyst will be discussed for taking help in answering the research question. Chapter 3 describes the subject matter of the research: the UK IPO’s markets, stock market and efficient market hypothesis. Chapter 4 deals in details about the research methodology and shows the aims and objectives of this study. Chapter 5 represents the analysis and finding according to 30th companies result through charts and t statistic. Chapter 6 deals with discusses the results obtained in the context of the underlying theory and the findings of other empirical research. Chapter 7 concludes the research outlining the limitations of the current study and makes recommendations for further work. Chapter 2 Literature Review: The purpose of this chapter is to provide me good background knowledge of my study. In this chapter, I will review various academic studies that investigate the price behavior of the IPOs and market efficiency. This chapter is very much important for every writer, who writing thesis, because it provides the background of the subject and whole research work. 2.1Efficient Market Hypothesis: 2.1.1: Introduction: In finance literature, the stock prices which already in the market and IPOs which has just introduce itself into the market, both related to the efficient market theory. According to Eugene Fama’s (1970), efficient capital market which believed that securities prices show information about the market. When the information comes out from the market, it is easy for the technical analysis for studying of the past stock prices to judge the future prices, and even can analysis about the financial information of the company earning and the asset values, which help investors to select undervalued stock which cause to get good return. For investor point of view, information is very much helpful. In Efficient market hypothesis, there are three forms
The first form of efficient market hypothesis is weak form, this is based on predictability. Past prices have no information about the future changes and prices can change randomly. According to Kendall (1953) found the result about prices changes follow the random walk. Financial researcher observed that random walk has zero correlation between price change at t and price changes at t+1. If the prices are predictable, then investor can buy undervalued and sell overvalued. Price can change according to the information which can not be predefined, it is selected randomly. The second efficiency form is semi strong, which shows the information publicly. According to the empirical research prices can effect through the annual report. According to Fama, Fisher, Jensen and Roll (1969), in strong form of efficiency were pioneered to accumulate abnormal return testing. Other examples are Dividend/Earning announcements Rendleman, Jones and Latane (1982), new issue market Ibbotson (1975) and merger announcements Jensen and Ruback (1983). The third efficiency form is strong, which shows the all private information and cause to reflect the prices. In this way trading can not be profitable and can not generate abnormal return. But the evidence proved that insider trading is slightly profitable Finnerty (1976, JF), Muelbrouk (1992, JF). On the other hand result shows that performance of mutual fund can not generate abnormal return Jensen (1968), Blake, Lehman and Timmerman (1997). According to the empirical the empirical evidence surveyed in Fama (1991) and Fama (1998) generally supports the idea that prices do seem to be weak and semi-strong efficient but that markets are not strong form efficient (there are theoretical reasons why strong-form efficiency is unlikely – Grossman-Stiglitz (1980). But there are some well known anomalies including a) Small firm/January effect b) Day of the Week effect c) Holiday effects d) Volatility tests/predictability of long run returns e) Autocorrelation properties, f) Contrarian/Value strategies, g) Momentum strategies h) New Issue market. Random Walk, which associates with the stock price. The logic of the random walk is that when the information comes out, it is immediate reflect the the prices, then tomorrow prices reflect on tomorrows’ news. News can not be predictable, and, thus, result of the stock price must be unpredictable. Lot of financial analysis and economists started to believe that stock price is least partially predictable. The economist indicates the element of the stock price and came to believe those future prices are somewhat predictable, on the basis of past prices. In this way investor are covering the more risk, as concern to get return. According to the empirical research of the market efficiency mean that investor cannot earn above the average return. If the market analyze says that market is efficient, it means that it could be efficient but they can make mistake in valuation, as was certainly true during the 1999-early 2000 internet bubble. If the investor’s minds are clear about the market, it can be efficient. Whether market is efficient but stock prices shows sudden change at any time, it is depend on earning and dividends. According to research, and the matter of the fact that market price is not perfect phenomena. Markets have made mistakes, as I mention earlier internet bubble. 2.1.2: Short Term Under reaction of the New Information: In the stock market, prices can be change as new information comes out. According to the Cootner (1964), Stock market has no memory that is the way a stock price behaved in the past is not useful in divining how it will behave in the future. Lo and MacKinlay (1999), found that the short run serial correlations are not zero and that the existence often many successive moves in the same direction enable them to reject the hypothesis that stock prices behave as true random walk, and it seem to force the market to move in short run stock price. In stock market, as an individual see stock rising and are drawn into the market which shows the “bandwagon effect”. For example, Shiller (2000) indicated that during the 1990s U.S. stock market was rise, and as a result, it effect the psychologically, because where the market goes, investors invest money along with other investors. It causes to shot up the market prices because of the new information. As the empirical research mention that stock market may not be mathematically perfect random walk, it is important to distinguish statistical significance and economic significance. The statistical significance is very small and is not allow investing to excess return. According to Odean (1999), indicate that investors are not able to understand extra return. But on the other hand, some traders are worse than buy and hold investors even the statistical evidence of positive momentum. Because large transaction cost affect the existence momentum. Lesmond, Schill and Zhou (2001) found the results about the relative strength strategies are not profitable because of trading cost. According to behavioral hypothesis about band wagon effects and under reaction to new information seem true, but result occurs in the stock market systematically. In 1998 Engene Fama research and mention on his empirical work on event studies, that search top discover if the stock price respond quickly to information. According to event such as announcements are earnings, stock splits, dividend actions, merger, new exchange listings and initial public offerings, Fama found that under reaction to information is about as common as overreaction, and post event continuation of abnormal return is as frequent as post event reversals. According to financial analysis, there is no certainty or guarantee for the result, because pattern will never be useful for investor, after they have received considerable publicity. This is called “January effect”, for example, in which stock prices rose in early January, seem to have disappeared soon after it was discovered. 2.1.3: Long Run Reaction: Stock returns are judged over periods of days or week in short run, and argument against the market efficiency serial correlation exists in positive way. But on the other hand many studies have shown the evidence of negative correlation over the period of long run return. In long run return, 20 to 25 percent variation can be predicted in terms of negative correction with past returns, Fama and French (1988). Other academic studies indicated that some times stock market prices overreact. According to DeBondt and Thaler (1985), investors are optimist or pessimist regarding the price behavior and correlation of returns. Some studies indicate that investors are overconfidence to predict the future stock price in terms of return earning, Kahneman and Tversky (1979). According to several studies, mention the correlation of the negative impact that buying the stocks or groups of stock are not in favor over the long period of time in term of returns. Stock return must rise and fall to be competitive with bond returns, it depend on the interest rate, when the interest rate goes up stock price will go down systematically. It means stock prices have dependency on the interest rate, in term of price behavior. In 1997, Fluck, Malkiel and Quandt mentioned in their study, that if we look long period of time around 13 year, they found the result that if the stocks have low returns over the past three to five years had a chance to high return in next period, and if the company had high returns over the period of three to five year had a chance to low return next period of time. This research confirm through the statistical evidence of the returns. It means that strong patterns are enable investor to get the excess return. 2.1.4: Day of The Week Pattern: Lot of studies found the result about the day of the week pattern, that January has been unusual month for the stock returns. In the first two week of this month, stock index tended to be higher (Keim, 1983).Haugen and Lakonishok (1988) mentioned in his book titled “The incredible January Effect”, that January has got high returns. In stock market also shows day of the week effects. In 1980, French indicated that Monday has got higher significance returns, and also some pattern show that month of the year effect in the stock market (Lakonishok and Smidt, 1988 and Ariel, 1990). These pattern are predefined, but has got problem. However it is not dependable. If it is dependable but small relative transaction costs exploit them. They do not gave the arbitrage opportunities that would enable investors to make excess risk adjusted returns. There are some other patterns available to be justifying about efficiency of the market. One of the studies investigates the size effect over the long period of time for small companies can generate high return than the large companies. According to Keim (1983), since 1926, smaller stocks of the United States have produced over1 percent than the large stocks. Another study examined the data from 1963 to 1990, got the monthly result about the smaller stock higher average returns than the larger stocks Fama and French (1993). Finally, various studies have been examined about the market performance and small and large stock companies, which has shown in graph. But the matter of fact, investigation indicate the result of the small firms have got survived, and the ones that later went bankrupt. Thus, the researcher examined the ten years performance of today’s small companies, none of them failed. Other studies found about predictable stock return based on financial statistic. According to Fama and Schwert (1977) found the result that short term interest rate related to the future stock return. Another study indicates that useful information shows the stock returns (Campbell, 1987). According to the Ibbotson data on stock returns during the 1926 through 2001, he indicated that rate of return around 10.5 percent. Fifty to seventy year ago, during the 1930s and 1940s common stock prices were under priced and average return was around 6 percent. 2.1.5: Conclusion of Market Efficiency: According to empirical research, it is hard to say which pattern fit into the market return pattern. Investment technical analyses have to watch the market very closely whether market is efficient or inefficient. It is hard to say that information is being properly incorporated in to the stock prices. Moreover, market can not be perfectly efficient for the long period of time, because information can quick reflect the market and its stock prices. 2.2: Price Behavior and Performance of IPOs: One of most attractive way for companies, to increase their fund through stock market by offering IPOs. Companies offer shares first time in publicly, which has considerable appeal in hug market, tempting investors with potentially phenomenal short term returns for exciting companies. Share prices are generally offered at a fixed price, set by the sponsors of the issue, and based on multiples, forecasts of likely future profits, or a combination of multiples and forecasts. Fixed price IPOs, which is normally under priced and have given opportunities for investor who buy the shares which cause to increase the share price immediately. In this case investor can make big profit if the shares can be purchased at the offer price and sold when dealing begins. In this way investors can get returns 5 % to 15% in one day, but with high variance across offerings. In 1980s and 1990s, the UK privatization issues tended to be markedly under priced, which was in favor for the private investors. They had been regarded as a success for the investor return and improvement in corporate performance and government revenue. Certainly, the UK program has inspired numerous other governments around the world to begin turning their public sector companies into publicly quoted companies. New issues in private sector are viewed as a route to get quick and easy profit, but there is usually seriously fails to perform. U.S. market study reveals, that nearly 5,000 IPOs initiated between May 1988 and July 1998, nearly a third no longer trade their stock and 44% sell at a market price below their original offering price. That’s the reason; Private investors try to invest their money with careful consideration. Lots of expert, studies about the initial public offer and have given the evidence that IPOs are not good investments, underperforming the market over the longer term. This would increase the company life couple of years, and underwriters over-hyping and stockbroker sell the share. 2.2.1:Financial IPO analysis: Ivo Welch: The financial expert has described the two parts. One part is short-run under pricing and second long-run underperformance of new issues. Welch studies that average return from the offer price to the price around 10% a day, when the market start trading. He describes numbers of issues about the issuer to leave money on the table.
IPO are very much profitable in short term horizon, if it is accessible at offer price, get their returns very quickly. On the other hand, long term new issues are not attractive package for investors, because they have underperformed the market around 30% to 50% over the period of three to five years. A study of the Tim Loughran and Jay Ritter found result and confirm about the poor performance. The financial analyst Welch explained about the long-run underperformance, that manager supposes to be very smarter than market. He should know the market timing, stock price forecast, earning and taking advantage of the overpriced stock market. The analysts can advise and point it out these figures to their investors; they get paid by company for selling these IPOs. Lots of people have examined the performance of initial public offering (IPO’s) in many countries over both the short-run and the long-run. Lots of studies have got evidence of high abnormal returns during the initial return period of the IPO’s (see for example, Loughran et al., 1994; Aggarwal et al., 1993; Ritter, 1991; Huang, 1999; Barth etal., 1999; Masulis, 1987, 1996; Firth, 1997; Kunz and Aggarwal, 1994; Aggarwal and Rivoli,1990). In the UK, many studies have focused on this issue and have reported the under pricing of initial public offerings (e.g. Keasey and Short, 1992; Levis, 1993, Espenlaub et al. 2000; Brown, 1999).It has been focus this pattern of the price behavior over the first or two year of issues. In order to compare the initial returns in a meaningful way the issue and firm specific characteristics of IPO’s should be considered. Ritter (1984) argued that high-risk initial public offerings are under priced more than low-risk offerings. Furthermore, he also argued that the stock prices of riskier firms are more volatile in the aftermarket. Keasey and Short (1992) reported that the new money raised at flotation is positively related to under pricing. Levis (1993) reported a negative relationship between issue size and under pricing. Huang (1999) found that larger firms tend to have small returns. Negative performance of IPOs in the long-run has been well documented. In 1975 Ibbotson reported a negative relationship between initial returns after the IPO and long-term share price performance. He reported that IPOs under perform by an average of approximately one percent per month in the second through to the fourth year after an IPO. Many other studies have reported similar findings (see for example, Loughran 1993; Loughran and Ritetter, 1995; Ritter, 1991; Yi, 2001; (for US), Levis, 1993 (for UK); Aggarwal et al., 1993 (for Latin America), Chen et al., (2000) (for China) Firth, 1997 (for New Zealand); Keloharju (1993) for Finland. In order to promote under priced, cause to increase initial returns. 2.2.2:Initial aftermarket price behavior: Many studies indicate that IPOs are automatically priced at a discount to market trading price. Ibbotson has documented a significant initial performance of 11.40% for the US common stock market at 1975.Rest of the other follow during the year, which show the same result as significant initial abnormal returns. In 1992 Wesserfallen and Wittleder research about the German stock and found an average return about 15%. In 1993 Kunz and Aggarwal investigate the same thing about Swiss common stock market and got the average initial return 35.8%.In 1991 Wang, Chan and Gua investigate about the US Reits market .They documented about the significant average return of -2.82%.Six year later Ling and Ryngaert did the same effort about REIT and found the result about under priced, which is around 3.6%.The Under priced IPOs which are systematic has been a puzzle in capital markets. Lot of researcher tried to explain this puzzle through theories but that gave a new vision about the subject. The first day abnormal price behavior is called “Winner Curse”. According to the theory, it has got two assumptions: unpredictable about the IPO true values and heterogeneity of information among investors. Whole market revolves with these two assumptions and carries on the market in which well informed investors. They are able to select the under priced IPO, which give the investor a good return and rest of them leave for uninformed investor. If the well-informed investor clicks the market, they would get on average initial return very high to buy under priced issues. On the other hand over priced has been left for uninformed investors and get the negative initial return which cause to suffer from the Winner curse. The issuers try to keep IPO under priced to build the interest for the bad informed investor to get involve in the market, in this way both informed and uninformed investors get the benefit for getting the positive initial return. The analyst tested Rock’s theory for the U.S common stock IPO’s and other research about U.S REITs did the same and all of the research support the winner’s curse. Keloharju (1993) and Michaeley and Shaw (1994), and Ling and Ryngaert (1997). Main thing about the winner’s curse is the size of issue. If the issues are larger, it would be more professional to manage and get the true value. Most of the time larger IPOs have fewer chances to be under priced. Reason for this it shows less out performance than small IPO’s shows. In 1982 Baron explained about the initial under price. He states the assumption about the information between issuer and underwriters. There is no certainty about the market demand for the offering and under priced offer would be the safe site for issuer and reduce the risk of equity offering. Writing the IPO’s under priced to make sure the demand for IPO. Another study tested about Baron’s model of IPO under pricing examined the 38 investment bank which IPO went to public during the 1970-1987 and participate his own share as well. In this way asymmetric information between issuer and underwriter is impossible, because they are the same, Muscarella and Vetsuypens (1989). They mention about the under price IPO, that asymmetric information can be full explain to go alone. Carter and Manaster (1990) researched about the relation between the price behavior and the image of their underwriters. They found the result about reputable underwriters is associated with less short-run under pricing compared with less image underwriters. The reason is very much obvious that more reputable underwriters are better informed and reliable rather than less prestigious underwriters, they leave less room for uncertainty, which is one of the two drivers in Rock’s winner’s curse theory for the under pricing IPOs. Allen and Faulhaber (1989) have explained for the abnormal returns of the stock offerings. According to their researched, the firm knows their prospect better. The firm’s prospect give the signal of favor of the market, which is the reason they offer under priced. This is big support for investor to get the signal from the companies who offer the IPOs. But the other hand Garfinkels (1993) researched unfortunately do not support the Allen and Faulhaber’s model. Almost all the researched and explanation stated that initial under pricing to the uncertainty about the IPO’s true value. Matter of the fact that more under priced IPOs have a higher out performance. 2.2.3:Long-term aftermarket price behavior: The entire academic researched indicated the short term return of IPO is abnormally higher. Contrary long term IPO performance is not too much attractive. In 1990, Aggarwal and Rivoli (1990) investigate the short term and long term IPO. He took a sample of 1578 from common stock during 1977-1987 and notifies the short term is outperformed and noticed a significant underperformed and also reported a significant return around 13.73% which shows the result about 250 days trading. In stock market investors are overoptimistic to get the high return at the time of offering. When companies do not seem their high expectation, after selling the shares introduce. This will cause to decline the stock share price and goes to underperformance. This is called fad theory, which shows the long-term price behavior of IPOs. In 1991 Ritter examined the long-term behavior of IPOs and found the result which firms offer during 1975-1984 are underperformed during the first three years. He shows abnormal return around -2913%, which is underperformance. Basically Ritter mentioned in his report, that underperformance IPO hide the fact to investors whose are sure to get return from the growing companies. Ritter also indicate about the offering price are setting low, but when they enter the market which cause to overvalue of IPO stock. In 1993 Carter and Dark carry on the Ritter’s explanation by providing the empirical evidence. They indicate about the information process and the sudden increase the value in the immediate aftermarket, on that time IPO information is hard to find which firms represent the overvaluation. They also mention about the fact that investor and underwriters spend less time to accumulate the information of IPO during hot market than during cold market. Carter and Dark indicate that less gather information from the hot market cause investors to make the error for positive valuation. This is confirming by empirical research. In market feed bank hypotheses book building is used, underwriter may under price IPOs to induce regular investor to reveal information during the pre-selling period, which then be used to assist the issuing price. The bandwagon effect may be subjected to market IPO. If investors do not pay attention only their own information about the new issue, but also pay attention to other investor who are purchasing, which may cause to develop to bandwagon effects. In the stock market, there is some psychological factor, that if good investors are not buying any shares, it mean other investor would not try to buy it, whether this IPO give him a good return. In bandwagon hypothesis has interested implication about the market feedback explanation, it shows the positively demand curves. Investors indicate positive information, but other investors know that there will be the partial adjustment, that offering price will be under priced. Other investors want to purchase additional shares which cause to get positive demand slope curve. Companies can not cut the offer price so high, because it cause to make doubt about the companies why companies desperately looking for cash. So study indicate that rather than to cut the offer price wait for good market condition which give you better result. Another study argues about the investment banker are superior to other because of the knowledge of under price offering, which allow them to do less marketing with buyer. This is matter of the fact that when investment bank want to go publicly, they get advantage about the IPO as well as client side. Variety of ways has been chosen by companies to be floated. This is depending upon the size of the companies, risk and regulation of the country. The most common way in UK: an offer for subscription, a placing, a stock exchange introduction and a public issue by tender. The under priced short run IPO refer to be observation of the coming market, short run IPO tend to be returns in a days or sometimes weeks after the offer. The evidences have been provided by Ritter (1987), Welch (1989), Ibbotson et al. (1994) and Rajan and Servaes (1997) and suggested that the initial average return of the US new issue market up to 16%. There are more study shows the evidence which has been done by Lee et al. (1994), Jacquillat (1986), Kaneko and Pettway (1994) and Ljungqvist (1997) that abnormal returns up to 14% in the developed countries like as Australia, France, Japan and Germany. The IPO of the UK has been studies by Dimson (1979), Buckland et al. (1981), the Bank of England (1990), Jenkinson and Mayer (1988) and Levis (1993) and evident that the first day average returns around 8.6% to 17%. In 1989 Weiss has used 64 U.S IPO during 1985-1987 to prove that initial day return were not significantly different from zero. In 1990 Peavy got the same result which Weiss got it. In 1992 Wang et al, studied about the real estate investment trusts (REITs) in the US by using a sample of 87 IPO and found the first day trading significant average return of -2.82%. On the other hand Levis and Thomas (1995) found the first day trading return around 1.91% by using of 105 investment trust IPO during the 1984-1992. Underwriters are writing IPO under priced. The estimated of the under price as the percentage difference between the price at which IPO sold to the investors and the trading share price. In the develop market how much price can be fluctuated by from day or by month, and result can come very quickly after offering the IPO in the market and show the result end of the first month. In Athens Stock Exchange has specified daily volatility limits of plus or minus eight percent. Thus the first day return of IPO would be 8% by force of government regulation. In Europe and U.S, offer price has been set just before trading on the stock market. But In other countries like Taiwan and Finland, there are some delay between offer price and the trading. In this way, they can adjust the price of under priced IPOs very easily. In U.S lot of companies are going publicly to raise capital. In 1999 and 2000, the average IPO was under priced by 71% and 57% respectively. In this two year market aggregated $62 billion. This period called ‘hot issue markets’. This kind of IPO put the pressure for issuers to change the way writing under price IPO. Chapter 3 Stock Market and IPOs 3.1:Stock Market Background: Stock market is playing a major role for investment. It is essential to understand the stock market background before going IPO. In recent years stock markets are getting worse in term of investment. People have been studying and investing about the stock market. Reason for this research about the stock market to decline the portfolios, which is harmful for investment point of view. Lot of investors wants to invest their money in the stock market. They must aware of the financial market. People have been trading in stock market for long time. But still people are not aware of the basic area. Everyday term we use to talk about stock market, where shares and bonds are traded. Basically Stocks Company is units of ownership for raising capital. Here we explained about the London Stock exchange which related to my topic. The London Stock Exchange is very much import for financial market around the world. In London, there are most successful companies doing business dynamically and participate in the stock market. The investors have been trading in London Stock Exchange for 300 years; investors are buying shares with expertise and market knowledge to become one of the famous equity markets in the world. They become leading Europe’s equity market in October 2007 after merging with Borsa Italian S.P.A. Any stock markets make the effort for doing business locally or internationally and try to generate more business for their investor. So London Stock Exchange did the same effort. It has strategic alliance with exchange around the world such as Tokyo, Tel Aviv and so on, for increasing the international presence and getting more business and benefit for their customer. The London Stock Exchange has focus four core areas, which mention below.
3.1.1: Market: The market gives the ways to companies for raising capital for growing their business. There are four primary markets.
3.1.2: Trading Services: The London Stock Exchange give the highly trading service in a wide range of securities, including UK and international equities , debt , covered warrants, exchange trading funds, fixed interest , depositary receipts and contracts for difference. They launched TradElect in June 2007. This is a new trading system which is giving us great opportunities to enhance the service. This system has given us a great speed for trading. 3.1.3: Market Data Information: The London Stock Exchange gives the high quality of service, news, real price, and financial data information for investor point of view. They try to give best technology to lead the market towards best direction, and try to upgrade the product and service, which is better interest for investors. 3.1.4: Derivatives: This is one of the pioneer diversification core equity markets. This is our internationally equity derivatives exchange and aim to become world’s efficient market. In investment, UK covered warrants is fastest growing market in the world. 3.1.5: Equity Market: The London Stock Exchange one of the best market around the world, where companies looking for capital and get listed. Approximately 2,800 companies are being listed, which market worth around GBP 3,500bn. According to our research, 293 IPOs were announced in 2004 and raised GBP 7,100m new capital. In main market Europe most prestigious companies being listed .In this market has 1,800 companies which market worth is more than GDP 3,500bn. On the other hand AIM is small capital growth market, which give the ways of small companies to raise the capital .There are more than 1,060 issuers which market capitalization has around GDP 37bn. This market place is global, and around 350 companies in 54 countries use a London market for generating capital. The international market always look forward for that kind of exchange where information is clear, system should be ok and has long term approach of the investors. The definition of the stock, considered as raise the capital through new issues. Stocks markets are referred to be collection of share and stock shares. This is just paper to declare that you are the part of the company. Further more we explain about the reason why company issues the shares in stock market. In terms of issuing share to return the good profit and help the companies rapid grow. Stock market trading driven by the stock, on the stock market is typically driven by speculation, based on company news and performance factors. The finding of market value of stock, there are two ways. Stock value is determined using some type of cash flow, sales or earnings analysis. This kind of stock valuation is based on historic data like ratios, statistics and other valuable attributes. There is another way to look stock market’s supply and demand. We can explain this briefly that it is depending on investors, whether how much investor buys and how much they sell. This trend often goes with short term and it is hard to understand and predict of stock valuation. 3.2: Efficient Market Hypothesis: The efficient market hypothesis is focused on the stock prices. Lots of people research and explain about that market and stock price behavior. If we look around the world, we can find lot of critics and uncertainty about the market. Markets always follow the rules and regulation, structure, theory and information which provide for investors. Its mean nobody beat the market along with this information. But still uncertainty in market whether investor try to beat the market along with this information, which cause to market crisis. This part identifies the theory and market behavior. It is hard to beat the market because there are some causes for stock market efficiency for the share prices which include and return all the market information about the stock market and stock price. In this theory shows that trade always be fair value of stock market, making their investor to buy under value and sell when the prices would be high. According to definition, it is impossible to capture overall market through selection of the best companies’ shares which cause to outperform the market, but investor want to get higher return and taking risk to purchase share. This theory was introduced by Louis Bachelier, who was a French mathematician. At the beginning, his work was ignored, then beginning in the 30s independent work corroborate with his thesis. The efficient market hypothesis indicates that, the agents have rational expectation and information should be correct. In this theory has mention that when new information is added in the market, gets the investor reaction, whether it is overreact or under react. In efficient market theory has required that if the investor reaction is random and follows the market pattern, in this way market can not be exploited to make an abnormal return, especially when transaction cost has been considered. In the market, one person can be wrong or can be everybody, but the market itself can not be wrong. The efficient market hypothesis has three forms, which shows how the markets work, is followed.
3.2.1: Weak Form Efficiency: The theory and research indicate about the weak form of efficiency, that past return reflects the future prices. Market technical analysis can not produce the same result, because of the market fluctuation. There is no specific pattern available to get the return. According to Fama (1991) research, weak form of efficiency based on accounting and macroeconomic variables. 3.2.2: Semi Strong Form Efficiency: The second form of efficiency is semi strong, which based on share prices adjust with publicly available information. This information is exactly he same, which case to get the good return. According to Patell and Wolfson (1984), Gosnell, Keown and Pinkerton (1996), publicly available information effect he share prices with in a minutes. 3.2.3: Strong Form Efficiency: According to strong form efficiency, share prices shows all available information whether it is publicly or privately, and nobody can excess this information to get the high return through this information. This strong form efficiency shows that where the investor can earn return for long term time. Even though some manager are trying to beat the market along with that information. 3.3: IPO Market: IPO stands for Initial Public Offer which has referred to as “public offering”. The companies announced the share first time in the market publicly. IPO are often issued by growing companies which try to expand their business, but can also be done by large companies as well. Basically, IPOs could be a risky investment. For investor point of view, they follow the market assessment through company reputation. They always go with historical data to judge the market, but the market is unpredictable for future prices. IPO firms are taking help to write IPO from underwriters and they offer the best price for their investor. For the individual investor, IPO can be risky investment. It has been predicted that IPOs does well on its initial trading days, but after that there are uncertainty in future. When companies want to go public, they hired investment bank to writer IPO. There are big name involved in the underwriting process include companies like Merrill Lynch and Morgan Stanley. When companies want to get listed, it means that they want raise their capital through publicly to expand their business. In initial money paid by the investor for the new issues, and goes for trade of share in exchange. An IPO give the investor waste range of space for future growth. The company is never required to repay the capital, but investors or shareholders required for future profit. Once the company listed, it will be able to issue more share through right issue. In this way it can be funded again. For writing the IPOs, investment bank has been involved as an underwriter. The company who issue share is called “issuers”. The issuer contract with the underwriter to sell their share to the public, then underwriters approaches investors with offers of IPO. Sometimes IPO are large and underwriters keep a commission based on percentage of the shares sold. Underwriters take the highest commissions up to 8% in some case. There are different ways to deal with multinational IPOs and domestic IPOs. Underwriters are main selling group. There is wide range of legal requirement; therefore IPOs typically involved one or more law firms with major practices in securities law, such as Magic Circle firms of London and White Shoe Firms in New York City. Institutional investors are buying public offer, but some shares are allocated to the underwriter’s retail investors as well. In U.S history shown, as IPO have been under priced. This cause to effect of initial offering of IPO to generate additional interest in the stock when it becomes publicly, and money left on the table, which cause to get highest return to investors. The overpricing is also an important part of IPO. If the IPO has been sold as higher price of the market price, its mean company loss their compatibility. If the shares value falls after first day of trading, it means that IPO would not write properly which cause to be overvalued. When the matter of offering price, investment bank consider many factors to reach the right target. They involve selling the share on right price which cause to maintain the IPO and selling the shares. Issuing price is one of the main factors of IPO which must be under price. The reason for the under price of IPO cause to be survive that company for a long time in to the stock market. If the price is under price, stock will perform well. If underwriters believe that an IPO will be “hot”, they’ll first offer the stock to their favorite large institutional investors and to active individual investors, who trade frequently. Most often, the only way for an average person interested in investing in IPO stock is to have a large account with one of the investment banks that have acted as an underwriter. In other words, your chances of getting early stock shares in an IPO are slim to none unless you’re on the inside, and if you get them it is probably because these are the unpopular ones. It is when the IPO market is slow, individual investors can reap the best returns. This is because institutional investors demand low prices for their participation and individuals can benefit. Individuals can trade IPOs in the aftermarket online or via their traditional full-service brokers. The first several weeks of aftermarket trading are critical times for IPOs and often the stock jumps considerably in the beginning of its public life. 3.3.1: The Underwriting Process: It is necessary to mention about the underwriting process, because when company decided to offered public through an “underwriting syndicate”. They are agreed to purchase the shares form the issuer and sell the shares to the client. When they are writing the IPOs, only limited broker or dealers are invited into the syndicate as underwriters. Underwriter’s syndicate members do not received equal allocations of securities for sale to their buyer. As an underwriters provide the consultancy with the company. They decided basic terms and condition for offering before trading and set the percentage of shares. Most probably, IPOs distributed wealthy investors, because they are able to buy bulk shares together and take the risk and hold them for long period of time. Sometimes firms decided that IPO is good for any individual investors, but the dealer may sell these IPO only selective buyers. 3.3.2: Valuing IPOs: Many companies when they decided to offer publicly, they are young growing firms. For valuing IPOs, there is no difference than valuing other stocks. The most common approaches use for valuing IPOs is discounted cash flow (DCF) analysis and comparable firm’s analysis can be used. Thus, historical information is limited for future profit or cash flow. Thus, a preliminary valuation may rely heavily on how the market is valuing comparable firms. In some cases, publicly-traded firms in the same line of business are easy to find. In other cases, it may be difficult to find publicly-traded “pure plays” to use for valuation purposes. The final valuation of the firm going public typically occurs at a pricing meeting the morning a firm is expected to receive S.E.C. clearance to go public. This pricing meeting is described below in section 7.1 concerning book building. Because the IPO market is especially sensitive to changes in market conditions, and because it takes at least several months to complete the process of going public, going public is a high-stress event for entrepreneurs. Numerous cases have occurred where a firm was expecting to raise tens of millions of dollars, only to withdraw the deal at the last moment due to factors outside of its control. Because most companies prefer an offer price of between $10.00 and $20.00 per share, firms frequently conduct a stock split or reverse stock split to get into the target price range. Stocks with a price below $5.00 per share are subject to the provisions of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, aimed at reducing fraud and abuse in the penny stock market. 3.3.3: Issue price: When company offers publicly, they appoint lead managers to help that company and decide on an appropriate price at which the shares should be issued. IPO prices can be decided in two ways.
Chapter 4 Methodology: 4.1: Introduction: This is the most important part of thesis to collect the data and information to be selected and appropriate methodology. The reason for this to provide the suitable options to researchers and finding unique information and access to opinions about the research objectives. Why proper methodology is required in the research process, and how it provides a sense f vision showing on the themes of research? Oppenheim, A. N. (1997) describes the need for a suitable research design arises whenever we wish to generalize our findings, even becomes more sensitive when we wish to undertake a more solid study. The Author design must aim at precision, logic-tightness and efficient use of resources. Poorly survey will fail to provide accurate answers to questions under investigation and will end up with ambiguity in the conclusion. 4.2: Research Methodology: Jill Collis and Roger Hussey (2003) identified different research stages that are supplementary of one another and that lead to final dissertation/thesis/report writing. The first stage is to identify research topic, second stage defines clearly the problem, third stage determines how to conduct research, fourth collect research data, fifth stages is Analyses and interpret research data and at final stage produce dissertation. According to them before proceeding for research work, one needs to look at two main research paradigms. The term paradigm refers to step by step progress of scientific practice based on the people’s philosophies and assumption about the world and the nature of knowledge; in simple it means how research should be conducted. The main two paradigms are Phenomenological paradigm and Positivistic paradigm. The Phenomenological paradigm concerned with the understanding of human behavior and focusing more on qualitative rather than quantities data. The phenomenologist viewed that social reality is dependent on mind and they like to use interpretative techniques, which seek to describe, translate and produce meaning rather than come with frequency. On the other hand positivistic paradigm seeks the facts or cause and effect relationship between variables and assumed that social reality is independent of us and exists regardless of whether we are aware of it. 4.3: Research Philosophy: Sekarn (2000), note that during the research work, the adopting of concerned paradigm and the relevant methodology is crucial. The words methods and methodology are usually used interchangeable, though methods refers to various means by which data can be collected and or analyzed while methodology concerns about overall approach to the research process, from theoretical frame work till practical data collection and analysis. The “phenomenological” paradigm most focuses to collect qualitative data, use small samples, generating theories about neutrality and are low reliable with high validity. While the “positivist” paradigm are more focus on quantitative data, use large samples and test hypothesis, independent of neutrality and high reliability with low validity. Here it is important to mention and realize that positivism is not the use of quantitative methods. According to Kolakowski (1968) it is very difficult to come up with a single idea that what positivism actually is? Further he argued that positivism is often stated as anti-metaphysical. Researchers who are inspired by the positivist are reluctant in considering how their own views and those of the objects are influenced by theoretical and cultural issues (Kolakowski, 1968). The basic reasoning of positivism assumes that the reality of the object exists which is not dependent on human behavior and is therefore not a creation of the human mind. Auguste Comte (1853) argues that real knowledge can only be derived from human observation of objective reality. Jick (1983) argued that the qualitative and quantitative methods should not be seen as rival approaches. Further he claimed that those who support “mixing methods” cannot show suitable and adequate guidelines on how the mixing of the two approaches can be accomplished. In addition to this Bryman (1988) favors the combination of qualitative and quantitative research to provide a more complete picture of a research. On the other hand, Stainback & Stainback (1988) conclude that differences that are present between both research methodologies not necessarily mean that one research strategy is superior to the other. Rather, these differences may make one methodology more useful than the other. It depends upon the nature of the research or the research question. They claim that the growing interest in qualitative research methodology does not mean that quantitative methods will not continue to be important. C and Hussey (2003) ascertain that research may be conducted using ontological approach in order to overcome the disadvantages of the independent methods and ensure rich data collection. According to Saunders et al (2006, p. 108) “ontology is concerned with the nature of the reality”. It is greatly concerned with the assumptions researchers have made about the way the world operates. They present two aspects of the ontology and widely acceptable and followed by business and management researchers. The first aspect is objectivism and is that social entities exist in reality external to social actors concerned with their existence, second is subjectivism and defined as social phenomena are created from the perceptions and consequent actions of those social actors concerned with their existence 4.4: Research Design: Two methods generally used for the research methodology are qualitative and quantitative approaches. Different researchers use these approaches in their researches for data collection, some use qualitative approach and some use quantitative approach. An important methodological option in conducting management research is the use of qualitative methods for data collection and analysis. Qualitative research mostly emphasizes on understanding complex, interrelated and changing phenomena, but it is also particularly relevant for the challenges or the problems that come across when conducting management research. Many authors have supported the value of integrating qualitative and quantitative approaches within a research design to address research questions (Denise, 1996). Amaratunga et al, (2002) argued that the quantitative approach grows out of a strong academic tradition that places mostly on the numbers that represent opinions or concepts. Over the past 15 years, the debate over quantitative and qualitative methodologies has gained an upward thrust. But still the opinions about the two methodologies differ from author to author. There is considerable agreement about the fundamental ideas and their practical implications for the conduct of research (Amaratunga et al, 2002). According to Labuschagne (2003), after a problem being identified then the researcher will be looking for some suitable tool or a method to investigate the problem. The advantage of the quantitative approach is that it measures, for example, the reactions of many people to a limited set of questions, thus facilitating comparison and statistical aggregation of the data (Labuschagne, 2003). Qualitative research on the other hand, is mainly concerned with the properties and nature of the phenomena. The word qualitative is greatly concerned and emphasizes on processes and meanings that are thoroughly examined, but they are not measured in terms of quantity, or in terms of amount or frequency. Qualitative methods can gather massive data about a smaller number of sample (people) and cases. The data gathered from the qualitative approach also provide in-depth and detailed and careful description of situations and events (Labuschagne, 2003). Jick (1983) viewed that the qualitative and quantitative methods should not be seen as rival approaches. Further he claimed that those who support “mixing methods” cannot show suitable and adequate guidelines on how the mixing of the two approaches can be accomplished. In addition to this Bryman (1988) favors the combination of qualitative and quantitative research to provide a more complete picture of a research. On the other hand, Stainback & Stainback (1988) conclude that differences that are present between both research methodologies not necessarily mean that one research strategy is superior to the other. Rather, these differences may make one methodology more useful than the other. It depends upon the nature of the research or the research question. They claim that the growing interest in qualitative research methodology does not mean that quantitative methods will not continue to be important. In this part, I discuss the main research approach and methods, which I will use in my dissertation and data collection. In order to meet the main objective, there are a number of issues that need to be addressed. Using quantitative research through comparing the performance of the new issues and find out the price behavior in first two years of the issue. Firstly, I found theories and professional Knowledge about the short term and long term performance of UK IPO which tend to be under priced or overpriced and get the abnormal high return, and how important the underwriters suppose to writer IPO under price which cause to get the good result for the investor which were reviewed on the Internet, magazines, text books and journals and so on. Secondly, I used the secondary data to analyze the relationship between IPOs under price or whether overpriced, comparisons the result of 24 month which kind of effect come through the market after new issues. Thirdly, drawing charts to compare the fluctuations between IPO performances of the UK companies, explain what do the charts mean, and show the clear result of significant abnormal return month by month. The different kind of IPO has been selected, based on last five year IPO, to find out the result and price behavior. Finally, summary the two results, which got from the data analysis, to identify my own view about whether price behavior of new Issue. 4.5: Advantages and Disadvantages of Qualitative and Quantitative Approach: The qualitative approach does have some inherent weaknesses (Miles and Huberman, 1984). Data is collected through different methods and ways so there is a time factor involved in this approach. Hence, the large volume of data gathered through this way may overwhelm the researcher and thus takes more time in the analysis of that data. The techniques used in this approach are not considered to be easy as such methods are considered not well established (Cavaye, 1996). But however, the difficulty of analyzing qualitative data is time consuming but still the data gathered through this method is not invalidated, or the does not affect the conclusions ultimately drawn on the base of this data. This is because rules of logic applied to the verbal data enable the researcher to make sense of the evidence and to analyze the data appropriately. Bryman (1993) has identified a number of issues regarding the use of qualitative research approaches in researches. First, the inability of the researcher to interpret events from the subject’s point of view is questioned without biases. Thus, this issue can be addressed by a multi-method approach to data gathering to some extent (Lin, 1976). Second, the relationship between theory and research can be weak, as qualitative research approaches are mostly criticized for not describing theoretical elements. However, Marshall and Rossman (1989) suggest a solution for this problem, saying that the researcher must show how they are studying the case of a larger phenomenon, to overcome this scenario. The linking of specific research issues to a larger theoretical construct shows that the research study illuminates a larger issue and is therefore of significance. Finally, the extent to which qualitative research can be generalized beyond the limits of a particular case is questioned. Bell (1996) suggests that researchers can address this issue through demonstrating that “the study was conducted within a structured methodology, which is guided by theoretical concepts and models and the use of a number of data gathering methods and processes.” Bryman (1993) has criticized quantitative research methods for their clear orderliness and their lack of concern over the influence of resource constraints. Furthermore, quantitative research is also known as “post-decision rationalization”. Gable (1994) suggests that for quantitative research to succeed in providing descriptive statistics, the survey, the instruments used in survey must ask the right questions and in the right way. Gable (1994) considers this approach weaker during data collection as compared to the qualitative approach. This is because once the research is under processing then it is very difficult for the researcher do make any changes upon realizing that something important is missing from the questionnaires or founding a question ambiguous. Therefore Gable (1994) suggests that the researcher should have a good idea about all the answers before starting the survey. Hence, traditional quantitative survey research would appear to serve as a methodology of verification rather than discovery. In this research qualitative research method is used for data collection, to explore the link between under priced IPO whether it tend to be under price or over price. This approach is adopted to get some response from the sample for the research questions 4.6: Qualitative Approach: Qualitative research establishes the meaning of relationships in terms of influences and actions. It is not concerned with the scale of activities, as with quantitative research, i.e. ‘that 65 per cent of people had a particular opinion’. The aim of qualitative research is to articulate the range of scenarios which may occur under different circumstances (Murphy, 1995). Qualitative research is conducted through a powerful and/or prolonged contact with a “field” or life situation. These situations are reflective of the everyday life of individuals, groups, societies, and organizations (Miles and Huberman, 1994). Another feature of qualitative data is their richness and holism, with strong potential for revealing complexity. Such data provide “rich descriptions” that are vivid, nested in a real life context, and have a ring of truth. Furthermore, the fact that such qualitative data are typically collected over a sustained period makes it powerful for studying any process (Amaratunga et al, 2002). The perspective and presentation of this research are mainly based on qualitative research as it enables us to impute subjective understanding but quantitative approach is also used where necessary. Dey, (1993) clarifies the difference between the two approaches of research (Qualitative and Quantitative) as “Qualitative data deals with meaning, whereas quantitative data deals with numbers.” Qualitative data, essentially, deals with descriptions of people’s experiences of what is occurring in their world, in order to understand and interpret how events and actions are generated (Dey, 1993; Eyles and Smith 1988).according to Robinson, (1998) “Qualitative data deals with meanings and distinctions as they reside in social practice.”The Myers describe the qualitative approach in these words “Those who are not familiar with qualitative methodology may be surprised by the sheer volume of data and the detailed level of analysis that results even when research is confined to a small number of subjects” (Myers, 2000) 4.7: Research Methodology For My Study: In my research work, I used phenomenological approach. As the study is not scientific but try to explore the IPO tend to be under priced or over price and performance of the IPOs. In this research, I could not use the positivistic approach because it was hard to collect data. In my research proposal I developed aim and objectives of the following and the study will focus to achieve aims and objectives by using academic empirical research and evidence and analyzed the 30th UK Company’s statistic. The reason of selecting 30th companies to explore the best answer of my research question. 4.8: Data collection: Bryman (2003) said that data can be collected in different ways and using different tools. But the researcher must keep in mind the aims and objectives of the research work and most likely researchers used ontological approach for data collection. Moreover, Bell (1997) argued that care must be taken to over analyses and impose more meaning on the results than is warranted, and equal care was taken not to attempt generalization based on insufficient data. The methods of data collection include primary data and secondary data. The options of primary data comprise interview method, question method. Secondary data collection means that data have been gathered by reading reports, reviewing documents, extracting figures, calculating significant ratios in order to identify trends. Comparing the primary data and secondary data, the secondary data is objective data, and more easy to collect than primary data. The nature of this research investigation lends itself into secondary data collection and analysis. At the beginning of the data collection, I select the 30 UK IPO during the performance of two years, which is sufficient statistically. I selected 30 companies’ data which is good to find out better result. For instance, firstly, I collected the new IPO data by the time they announce in the market during a period from 2002 to 2007 from FTSE 100 in the UK from www.yahoo.co.cn/finance website. According to that data, I analyzed and found “t” statistics, which show the result of performance. In this research, I shall explain the graph and shows the result of performance of IPOs. We know that the stock market is like a display window of a country’s economy. IPOs can offer in stock market for raising the capital which supports the companies who try to go first time publicly. 4.9: Aims: The overall aim of the investigation was to establish to find out the IPO underperformance and over performance in the market after offering .In essences, the investigation was to investigate whether under priced IPO is good for the company and the short term and long term performance of the Shares. In order to achieve the aim, three core objectives were identified and these are discussed below. 4.10: Objectives:
4.11: Method of Analysis: The evaluation of stock data will produce both quantitative and qualitative data. Historical data research will provide a picture of previous performance between new issues. The quantitative method is defined by Saunders (2002) as “involve some numerical data or contain data that could usefully be quantified to help to answer the research questions and to meet the objectives.” In my dissertation, I am using the quantitative methods, which include comparison and examine the performance after first trading day and performance of first month by month, and also through exploring price behavior of UK IPO. Empirical Research is based on objectivity and universality conclusions, and the knowledge must be based on observation and experimental facts emphatically. Through observation data and experimental study to explore general conclusions. According to the principle above, empirical research summed up the essence of things and attributes the development through great amounts of observation data, experiment and investigation. In my research, observed data about the new issue, compare the performance from the first of trading, the detailed of my research methods as followed. 4.12: Analysis Methods Comparing The Performance Of The New Issue: 4.12.1: Chart Comparison Analysis: According to Clifford Pistolese’s theory of using technical analysis, the advantages of the chart comparison analysis are as following:
Based on the all above advantages of charts analysis I drew the charts through comparing the month data of the UK IPO from the stock market index 2002 to 2007 and the show the result of price behavior ad the performance of the first month of trading. Therefore I am able to find out the whether IPO are under price or over priced and the performance of the company after trading and the price fluctuation of new issue. CHAPTER 5: Analysis and Findings Based on analysis using the quantitative research methods, such as comparison the price behavior of IPO, these research methods will show picture of the trading performance and after the first month trading result about the abnormal significant return, which show in data and chart. In this part all the chart I mention to clear understanding and clear picture of the IPOs performance and the price effect month by month. I used 30th companies to find out the performance of IPOs after trading. I made testing through mean, standard deviation and T statistic. First, I mention the mean chart, which comes from the 30th UK companies. We calculate mean of a collection of 30th UK Company’s data of the arithmetic average and adding them up and divided by their number. Basically, this is way to get the average of the companies. Different companies have different abnormal return. On behalf of this return, we analyzed the average return of all POs. Then I mention standard deviation chart which showed above. Standard deviation represents the risk of the securities portfolio. This is standardized testing. This is examined by the number of abnormal average return through different variance. It was necessary to mention both analysis mean and standard deviation, because without mean and standard deviation, I was not able to complete the “T “statistic. In this way, we can see the whole picture of our analysis and find out the result about the performance of IPOs. According to my analysis and finding of average returns of IPOs. First, we describe the mean, then standard deviation and finally we reach the conclusion of our research of T chart. The T chart shows about the average return of IPOs. When the company announced first time IPOs in market. What kind of result comes out from the market? Whether IPOs price tend to be under priced or over priced. Further more; I distribute this analysis into three different graphs to clear view and understanding the performance and price behavior. In T statistic combines the whole companies IPOs abnormal return along with mean and standard deviation. There are three charts which I mention below. In first part of the picture or diagram, we distribute 1-8 months result, whether IPOs are under performed or over performed. If we look at the data, I found first month average return is about 1.82%, which is significant after the initial public offer. It means that first month of result is significant and high abnormal return. Then second month return went down and keep up and down. It means, there is no market consistency. According to this result short term performance look ok. If we look at another chart which is showing 9-16 months result. It seems to under perform. At the beginning, the performance seems ok but after the 10th months, the average return of IPOs -2.48%, which is under perform. This performance shows that when the IPOs entered the market, return was too high, but after the 10th month, it was getting down, which shows the over value of IPO. According to the third chart 17-23 months result, it seems underperformed. Through out of analysis, the abnormal average return is high for short term, but on the other hand long term performance seems underperformed. The market could not carry on the consistency, and underwriter could not write the good price, which cause to maintain for long term investment. It means IPOs tend to be under priced but just for short term purpose, on the other hand, IPOs can not carry on for long term performance. In the mean while short term IPO can perform well but the matter of the fact long term IPO would be underperformed. Chapter 6 Discussions: In this chapter the researcher will reassess the detail findings and discuss from the whole research. This will be done through the analysis and academic empirical research of the result. The analysis and findings from the research, relates to the objectives mentioned. The research findings will be discussed in detail in order to draw conclusions and recommendations for the future researches, which will be discussed in the next chapter. Discussion will be done on the findings by the critical evaluation in the literature to draw some conclusion for this research. Different views and idea about the research aims of various empirical researches will be discuss in relation with the result obtained from the IPOs performance and the price behavior and market efficiency.. This chapter would discuss about the whole work and summary of my data which I found in chapter 5. If the company looking for fund rising they definitely go to stock market. IPO are normally announced all over the world but according to their countries’ rules and regulation. European Exchange is more liberal than U.S. Trading is not automatic event in London Stock Exchange. Company has to request for the firm. Most probably sponsoring broker of the issue submits the application. Member of the firms can not issue without notification. The process involves for IPOs Participated the paper work when conditional offer has been given. When company wants to go public, they have to issue shares through underwriters. Underwriter writes the IPO under price according to the market information and able to sell quickly. Investors are buying those shares because of their on benefit. After Buying IPOs, they can get returns quickly and earn money. 6.1: Comparison of findings with existing theory and previous empirical research: Lots of financial analyst research about initial public offer. According to my data analysis and academic empirical research, try to compare the IPO prices, after market result and market efficiency. The market revolves in two part, first short term and second long term. As short term investment as concern, this is the best approach for getting high abnormal return. There is different kind of phenomena about the initial public offer under pricing, whether market is hot or cold. If companies are being offered through to well reputable name to write their initial offers, which they can get a good return in term of service, and they are able to maintain the share price for a long period of time. This is big puzzle about the over or under pricing of IPOs and financial analyst and academic empirical research hard to say any fixed result. Once the shares get into the market, underwriters suppose to know, what kind of market condition exists, whether it is hot or cold or aware the whole market speculation. Underwriters have advantage of the market over the issuers that cause to lower their own risk about the price. There are lot of model introduce for the IPO under pricing and over pricing, and different people adopt the different approach to conclude that topic. According to the academic research, Rock model is one of the most convincing model (1986), who applies the winner curse concept to the new issues. In this model, he mentions two groups of potential investors in the market. One is informed and other one uninformed. Informed investors are prepared to evaluation costs to access the after market performance of the offering. Other investors would apply for IPOs they expect to be traded a premium over the offer price. It depends on the market condition and its share prices. On the other hand, uninformed investors invest their money in IPO market and afterward IPO price are not under priced, it cause to loss their money and leave the IPO market. According the whole thesis and academic paper, underwriter write IPO undervalued and investor buy those shares for getting the high return. According to my data analysis and research through out empirical research indicate that IPO tend to be under priced which cause to get high abnormal return after the trading day. It means that for the short period of time, IPOs are over performed and return is significantly high. According to my data analysis first month return indicate 1.82% which is high abnormal return after the first month. If we measure the return after ten month result, it shows -2.48% which indicate that initial public offering are over priced. The Summary of the whole finding and analysis indicate that market can not be predictable whether this time market could be efficient and this time inefficient .In Efficient market hypothesis prices reflects information and according to information market changes quickly. So according to efficient market theory, there is no specific term describe for market performance but short term investment can get benefit and according to IPO, short term investment of the IPO is valuable rather than long term performance. According to empirical evidence shows the same result which I got in my T statistic. CHAPTER 7: Conclusion: This chapter gives brief summary of the overall research activities and also some recommendations for the future research for the future researches. Research was conducted about UK IPOs pricing and performance after market trading and market efficiency.. The approach used for the gathering the data is quantitative approach. This research conclusion based on the academic empirical research and data analysis. Before the research was carried out, the research topic was analyzed from the literature available to analyses and understands the different views and thoughts of scholars and researchers about the research topic. This paper shows the thirty UK IPO, which has selected different companies during the period of 2002 to 2007. According to analyzed the whole paper, we noticed that IPO under pricing has been discovered in virtually all markets of the world. Several theories about IPO under pricing do not imply any kind of prediction about the market. We argued both short term performance and long term performance regarding investment and pricing point of view. We get the result about the IPOs conventional firms display significant under pricing with the vast literature of IPOs. The matter of the fact that investors try to go with short run profit and try to get high abnormal return. In my research, I have three objectives to help me out to achieve my aim of this dissertation.
The main objective of this paper to find out the result about the IPOs price behavior. We found the result through empirical research and t statistics data analysis. Our result of the thesis indicate that the uncertainly of the market. Different analysis found the different result the abnormal return. When comparing t 2.93% initial abnormal returns for the small issues to the 1.7% initial abnormal returns of the large issues. It shows the comprising of the small issuer and large issuer. We try to find out long run performance of the IPO over the period of twenty three months price behavior. The result found a significant underperformance after the few months. The t analysis diagram shows the result about the price behavior and the performance of IPO. We used 30th UK companies’ data, which found it form UK FTSE. Throughout the empirical academic research and t analysis, I found the average return 1.82%, which shows the high abnormal significant return. We also examined that initial after market price behavior varies strongly different than other countries. According to my research and analyze the data about the long term that whether we take different companies and whether take specified IPO the result would be underperformance. The result of the data indicate by the significant 2 years sample abnormal return of 0.254 and mean 0.0061 and standard deviation is 0.132 respectively.Differnt countries found the different result according to their stock market and their new issues. According to research explanation of abnormal price behavior we first look at the size of the issue. This is the factor of the market to underperform or over performs for the short term or long term. According to my research larger issues are associated with less risk, because large issues manage by the professional who got the knowledge and well known about the market and therefore give less reason for initial underpricing and subsequent out performance. We found the result according to my research and according to other academic research shows that companies are outperformed on the short term time and underperformed on long term time, which contradict of our expectation. 7.1: Learning Review: At the start of the my research, my feeling were that, I was very confused, because when you come from a totally different background and study structure, you have no clear idea of what will be in the dissertation, but when I start working on my thesis, I was very happy to know about my strengths and weaknesses, which I think will be very helpful in future for me. After spending so much time working with performance, both in terms of work and study I have become so much more familiar with the concepts, benefits and downfalls of performance management as a whole. During the early stages of the report I had several instances where I wanted to completely change my research topic, however I persevered and it was worth sticking at as I really enjoyed working with this topic area. Another thing which I feel, I have to cope with, is communication. I feel very difficult to adjust myself in any environment where I’m not feeling easy & confident. For me, this research was very good as a learner in order to learn from my weaknesses and to cope with it. One can learn and improve his weaknesses and strengths by self assessment, and by keep on trying to communicate with others. Time management skills are also very important to recognize and solve personal time management problems. You need to think how you currently spend your time. How do you allocate time for study, work and your social life? Are you in control of your time or do you allow others to ‘steal your time. With good time management skills you are in control of your time and your life, of your stress and energy levels. You make progress at work. You are able to maintain balance between your work, personal, and family lives. You have enough flexibility to respond to surprises or new opportunities. I feel that I have to work out more about my time management skills. That’s what I learnt during my research work. From this research study, I came to know that I have to improve my problem solving skills, decision making, time management skills and communication, which will be very helpful for my future. Appendix Company1 Company 2 Company3 Company4 Company5 Company6 Company7 Company8 Company 9 Company10 Company11 Company12 Company 13Company14 Company15Company16 Company17Company18 Company 19Company20 Company21Company22 Company23Company24 Company25Company26 Company27Company28 Company29Company30 AR = Abnormal Return References and Bibliography Aggarwal, Reena and P. Rivoli; 1990, Fads In The Initial Public Offering Market?, Financial Management 19-4, 45-57. Allen, Franklin; and G.R. Faulhaber; 1989, Signaling By Underpricing In The IPO Market, Journal of Financial Economics 23-2, 303-324. Alli, Kasim; J. Yau and K. Yung; 1994, The Underpricing Of IPOs Of Financial Institutions, Journal of Business Finance And Accounting 21-7, 1013-1030. Carter, Richard B. and F. Dark; 1993, Effects of differential information on the aftermarket valuation of initial public offerings, Journal of Economics and Business 45-5, 375-392. Carter, Richard B. and S. Manaster; 1990, Initial public offerings and underwriter reputation, Journal of Finance 45, 1045-1067. Garfinkel, John A.; 1993, IPO Underpricing, insider selling and Subsequent Equity Offerings: Is Underpricing a Signal of Quality?, Financial Managemen, 74-83. Gerbich, Marcus; M. Levis and P. Venmore-Rowland; 1999, Property Investment and Property Development Firm Performance around Initial public Offerings and Right Offerings: U.K. Evidence, Journal of Real Estate Finance and Economics, 18-2, 207-238. Global Property Research; 1998, Handbook of European Property Companies 1998, First Edition, Global Property Research. Grossman, S. and O. Hart; 1980, Takeover Bids, The Free Rider
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