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Essay / Research Paper Abstract
Empirical evidence suggests that there are common occurrences of abnormally high returns on the first day a stock or share has been listed on the stock exchange. This 5 page paper considers how and why this may occur looking at a range of theories. The bibliography cites 9 sources.
Page Count:
5 pages (~225 words per page)
File: TS14_TEAbrIPO.rtf
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Unformatted sample text from the term paper:
trading. There are many example, on notable example, which has also resulting in an abnormally high price earnings ratio of over 80 has been Under Armour. There appear to be
many reasons why there will be abnormally high returns on the listings day, but of we look at the need for an IPO to be successful it appears that a
great deal of the influence is not unexpected as IPOs tend to be under values at the offer stage. The level of
under pricing tends to vary, however, it has been noted by several studies that this averages above 10% in most markets when the issue price is compared with the
closing price on the first day of trading, there are also recorded incidents where the under valuation was as much as 45% - 50% (Aggarwal et al, 2002). This is
bound to lead to an abnormal pricing when the market forces come to play ion the listing day. The research into why this occurs is diverse with many theories being
postulated. On close inspection of these theories there are commonalities such as the asymmetry of information and the role or reputation of the underwriter and fears of an under subscription
prior to the listing day (Aggarwal et al, 2002, Chishty, 1996). The phenomena of asymmetry of information is generally accepted as a factor
in most commercial investments. Baron (1982) saw this as the key to the use of discounted IPO pricing to be used as an incentive to create a market to purchase
the shares. His theory was that the investment banking putting the offer together will have a much greater level of knowledge about the company than the investor. As the investment
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