SECTION I: INTRODUCTION
By virtue of an accelerated dynamic economy, China’s stock market has witnessed rapid growth from a global perspective over last decades, along with massive IPO activities emerged with a huge amount of fund raised. The reasons why the Chinese initial public offering (IPO) market and its abnormal characteristics have drawn more interests from investors can be attributed to multiple aspects.
First, one of the most significant puzzles of IPO – underpricing – is at an unimaginably high level in Chinese IPO market. Although the degree of underpricing varies enormously across countries, the unusual IPO underpricing phenomena in Chinese IPO market are shocking and become a hot issue all over the world. Loughran, Ritter,
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Third, the Chinese IPO market has witnessed a rapid development over the last two decades. During this time period the Chinese IPO market experienced many improvements in relation to IPO issuance, including pricing methods, allocation mechanisms and issuing systems (Citation). At the meantime, a variety of boards have been initiated in Chinese stock market in order to ensure that different types of firms are able to meet the capital-raising goal from an external source, such as boards for B-shares, ChiNext.
In order to propose a comprehensive explanation, scholars with various academic background have conducted both theoretical and empirical researches from different perspectives all over the world. Additionally, relevant factors which have potential impact on IPO underpricing have been identified and discussed, including ownership structure, allocation mechanisms, reputation of underwriters, firm- and industry- specific conditions, regulation background, etc.
However, among existing research outcomes, in terms of Chinese stock market, few studies have re-examined the practicability of those theories within a post-crisis context. In this study, I will try to make contribution to existing theories and models on underpricing of IPOs, by exploiting the previous theories – particularly prospect theory, within a Chinese stock market context.
The structure of this proposal is as follow. In Section II, the literature on underpricing of IPOs,
Nowadays, the prestige of the New York Stock Exchange (NYSE) is clearly attracting a large number of Chinese companies. Commonly, firms such as Alibaba seek to launch initial public offers (IPO) in foreign markets raising the capital that the firm needs to expand its businesses across the globe. Nevertheless, to deal with stock market reactions after an strong debut represents a great challenge for large corporations. Spinal (2014) states that “buying the shares of fundamentally strong companies soon after they hit the public market is fraught with the risk of short-term losses for retail investors”. Certainly, IPO initial returns are profitable, but it is important to consider the dramatically fluctuation that it may face due to volatility and high information asymmetry.
In this paper the questions regarding a businesses decision to go public will be addressed. Recent changes such as Sarbanes-Oxley governance ruling have had significant impact on the planning and execution of IPO's however, going public still remains the best route to additional capital for a company. We will also take a look at Google's successful rollout of their public offering. However first we need to look at what it takes for a company to go public. In the text of the Fundamentals of Corporate Finance the initial description of IPO succinctly captures the essence of need and subsequent process of an IPO.
An initial public offering (IPO) is defined as the first offering of shares by a private company to the public. A share is one of a finite number of equal portions of the capital of a company that entitles the shareholder to a proportion of distributed, non-reinvested profits known as dividends, and to a portion of the value of the company in case of liquidation. Shares can be either voting or non-voting, meaning that the shareholder may have the right to vote on the board of directors and thus the corporate policy (Draho, 2004).
lu the l9SOs. the average first-day rcliirn on inilial public offerings (IPOs) was 7%, The average firsl-day return doubled to almost I5 ' ' 'i during 1990-1998. before jumping to 65% during Ihe internet bubble years of 1999-2000 and then reverting la / i % during 2001-2003. We attribute much of the higher underpricing during the bubble period to a changing issuer objective function. We argue that in the later periods there wav less focus on maximizing IPO proceeds due to an increased emphasis on research coverage. Furthermore, allocations of hot IPOs to the personal brokerage accounts oj issuing firm executives created an incentive to seek rather than avoid
The quality of companies listed on the A-Shares Market is far from satisfactory, while most of the companies with the best growth potential and highest returns to investors list abroad. Moreover, the A-Shares Market remains one of the capital markets with the largest fluctuations in the world!
This organizational pricing tactic gets the share prices opposite from the great demands of the community investors. The political incentive also plays a role in determining the underpricing of the IPO shares as underpricing allows for strong government-oriented framework in China. Through the high returns, these Politian’s entice more potential new issuers and political media attentions. Getting a wide reporting in the top political news televisions and other media outlets are vital for these politicians as such prominences may underwrite to their political position. Marcel argues that powerful partisan media in China is more likely to pull attention from the government officials that facilitate the advancement of these politicians’ career. The high demands of the IPO shares attribute to a huge quantity of national investors in China. As seen in the figures presented above, there was a growing number of individual investors involved in trading A-shares in the last decade. According to Diebold and Yilmaz, there have been over 200 million separate domestic stockholders in Chinese financial market by the end of 2012 (p.188). The great demands for emerging firms are also due to absent alternate investment choice in China, therefore the National Bureau of Statistics of China, the income per capital of the Chinese nationals increased on average by 14.5% per year on from 20020to 2012 (Diebold, Yilmaz, p.190). In the meantime, the
What exactly is an IPO (Initial Public Offering) is the first time a company sells stock to the public. Companies can raise money by issuing stocks or bonds and the companies are either public or private. Private companies have fewer shareholders and they are not required to share as much information and it is very unlikely that you would be able to purchase their stock. Done properly an IPO will support your company’s growth and it can change the lives of everyone involved including the owners, employees and investors.
Chowdhry, Bhagwan & Sherman. (1996) has documented that interest rate has a positive relationship on underprising. Chowdhry, Bhagwan & Sherman. (1996) use the case of information leakage to explain the causes of underpricing. They examined the differences between oversubscription and underpricing by comparing US and UK style IPOs. They argue that the reason for the reducing cost of underprising is due to the interest earned on the subscription funds and, therefore, induce issuers to underprice more. From this point of view, they conclude that in the periods when interest rates are high, the underpricing is higher also. Using data from 431 IPOs during January 1986 - December 1998, Johnston & Madura (2003) examined the effect of interest rate on initial return of financial institutions engaged in IPOs. The ordinary least squares (OLS) regression results suggest the environmental conditions that affect the degree of uncertainty affect the degree of underpricing of financial institution IPOs, especially investment banks.
21 Capped Participating Preferred ................................................................................. 22 Limitations ........................................................................................................................ 24 Garbage in / Garbage Out ............................................................................................. 24 Simplifications .............................................................................................................. 24 Deterministic/Stochastic Model................................................................................ 24 Seniority.................................................................................................................... 24 Conversion ................................................................................................................ 25 IPO ............................................................................................................................ 25 The Nature of Common Stock ...................................................................................... 26 Black-Scholes ............................................................................................................... 28 The Template, a Practical Example, and a Conclusion .................................................... 29
Furthermore, the fees in European IPOs have decreased overtime whilst fees in the US for large IPOs have increased. They find that the differences in the way the costs are structured across continents have little explanatory power. Instead they suggest that the difference between the two markets is the level of competition. In the US the IPO activity is dominated by a few domestic banks, meanwhile in Europe; the US underwriters are evenly matched with European ones (Abrahamson et al 2011).
The dataset for the regression model intended to investigate the statistical relationship between the non-financial factor and valuation is collected from Pitchbook. Since valuations in VC rounds are often highly confidential, the sample size is quite small, including 107 companies with 230 founders in total. However, as elaborated in section 4.3, the descriptive statistics for the two separate datasets demonstrated that the dataset is representative of the larger start-up community.
An initial public offering (IPO)—is the procedure by which organizations go from private to public and sell stock shares in their firm. Once a company is public, it is owned by the shareholders who purchase the company 's stock when it is put on the market.
China, arguably the most robust economy in the world, shocked everyone when it announced that its key stock market had crashed. When the facts came out it became clear that this was much more than just a blip on the radar, what it actually represented was a huge plunge. This plunge sent many traders into panic mode, as many key Chinese equities were trading at levels that many thought were once implausible. Making matters worse was the fact that the crash occurred at a time when China was looking to promote the strength of Chinese stocks. There is no other way to look at the situation; the crash of Chinese stocks resembles a global issue and one that has the potential to spread to other important global markets.
It is not uncommon to see private companies valued as high as 100 times revenue in late stage funding. Unicorns, which have become synonymous with tech companies valued over $1 billion, are now receiving blowback after former Silicon Valley darlings lost their luster on the public market. Just this past year a number of companies and boundless unicorns saw their values slashed leading up to going public. Prior its IPO, Square was valued in the private markets around $6 billion. As we know the payment company IPO’d at just about half its private value and has watched the stock plunge over 30% in its relative short existence .
Because the stock market during that period was too small and too thin and itself was searching for its own way. The other problem is the inappropriate methods applied to the model, especially in the early stage (Song, 2005; Liu, 2004). In order to attempt to prevent the second problem, the strengths and weaknesses of several different models will be discussed and the more suitable one will be chosen.