1.1.3 Effect of IPO underpricing - Evidence from other countries
The research on the IPOs initial performance has attracted many interest from globally especially the academic scholars and researchers. According to the global evidence, most IPOs are underpriced as to generate more interest in the newly publicize stock. However, the initial performance of IPO level can be explained by other factors and hence, there are also researchers who trying to study the factors that influencing the performance of IPOs. As the IPO are often being underpriced which resulted in losing most of the potential capital of the issuer.
1.1.3.1 Europe Countries
Pons-Sanz (2005) had analyze the effect of underpricing of IPO and the beneficiaries of the underprcing…show more content… In their studies, they concluded that there are two theories that explaining the relationship of initial underpricing and aftermarket liquidity. First theory is the ownership dispersion hypothesis in which the initial underpricing will be attracting more shareholders and resulted in enhancing the liquidity of secondary market. Ljungqvist (as cited in Bomans, 2009) further explained that dispersion is highly preferable by the managers of a firm as this is one of the way to dispersed the shareholders as it will effecting the risk of hostile take-over and reducing the chances of monitoring of the manager by the shareholders. Bomans (2009) cited from Brennan and Franks as their theory supporting that the underpricing of IPO can effect the monitoring chances towards the manager by the shareholder. Second theory is the information production hypothesis and was supported by the model of Chemmanur (1993). They purposed that more public information will be produced as the IPO underpicing will attracts press and analyst coverage and hence improving the liquidity as it will reducing the information asymmetry problem in the secondary…show more content… The undepriced of the IPO is explainable by the theory of signalling. In this case, the issuer is on the motive of using the dynamic strategy to create a good impression among the investors while buying the first issue at underpriced and the firm can be selling the IPO at a higher price during the season offerings (Bomans, 2009). As after the first offering, the share price had increase and the firm had a higher firm value so most of the investors will be more likely to buy the IPO again because of the publicity gained. Also, Bomans (2009) cited from Ljungvist that manipulating the price can reach the price stabilization and this action is legally to be done in most of the countries in the world. He further explained in his study that most companies wanted to attract the investors by showing them the company is supporting a stable price and so setting a underpriced IPO can result in reducing the chances of price