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Evaluation of IPO Statistics

Examine the performance of the IPO firms in the chosen industry sector 2 years after they were listed on the ASX using the 2-year holding period return. Compare and contrast the 2-year performance with the initial return calculated for this industry sector in Question (1). The formula for 2 year holding period return (Ritter, 1991, p.14) is 100return period holding 22×???????=?ttPPPyear P2 = the adjusted closing price on the 2-year anniversary. If the first trading day is April 1, 2015, then the 2-year anniversary is April 1, 2017; if the 2-year anniversary is a non-trading day, then use the adjusted closing price of the trading day immediately prior to the 2-year anniversary. Pt = the adjusted closing price on the first trading day. Next, for each IPO firm in the chosen industry sector, calculate the corresponding 2-year holding period return for All Ordinaries Index by using the adjusted closing value of All Ordinaries Index on the first trading day of the firm you want to compare as Pt and adjusted closing value of All Ordinaries Index on the firm’s 2-year anniversary. Based on your analysis result in Questions (1) and (2), would you recommend a client to invest in the IPO firms in your chosen industry? Why or Why not? You are required to provide justification(s) to support your recommendation. (6 marks) 3. Assessment objective: This question assesses your understanding of the reasons for the occurrence of short-run IPO under-pricing and ability to compare and contrast these reasons using the results of an empirical study (Topic 4 Learning Outcome). Select and discuss one theory/proposition that in your opinion provides the most plausible explanation for the occurrence of short-run IPO under-pricing in the US and/or Australian stock market. Perform some background research and use the findings to justify your selection. In attempting the above task, you are expected to use at least five academic references. You may use articles from academic journals or textbooks, but not Wikipedia, Investopedia or other non-academic Internet websites. You must properly reference (Harvard style) all sources of information used. (12 marks) 1 The selected high-income economies are Germany, Hong Kong SAR, Japan, South Korea and the United Kingdom. Then pick one stock market from the selected high-income economies1. Describe one study/article that empirically investigates the existence of short-term IPO under-pricing in the stock market you have chosen. To answer this question, you are expected to describe the study (including the sample of IPO firms examined, the degree of IPO under-pricing in the selected market and the factors explaining the degree of under-pricing in the selected stock market) and the empirical results on the factors explaining the short-term IPO under-pricing, and discuss the reason(s) proposed by the study to explain the existence of IPO under-pricing in relation to the theory you have identified and discussed for US and/or Australian stock market. 

Evaluation of IPO Statistics

Descriptive analysis of the initial public listing:

Initial return

Mean

0.094234

Standard Error

0.049411

Median

0.057778

Mode

0

Standard Deviation

0.261457

Sample Variance

0.06836

Kurtosis

6.076875

Skewness

1.44621

Range

1.548429

Minimum

-0.55143

Maximum

0.997

Sum

2.638556

Count

28

The above table represent the descriptive analysis of the overall IPO listing, which is been conducted between the 1 April 2015 to 31 July 2015. In addition, the analysis relevantly evaluates the mean, median, mode and standard deviation of the overall initial public offering conducted in the Australian capital market. The number of companies used in the evaluation is 28, which helps in understanding the overall valuation and risk involved in the investment of IPO. In addition, the overall evaluation mainly indicated an average return of all the companies provided from the IPO at the level of 9.42%. In addition, the median is relevantly calculated at the levels of 5.78%, while the mode is calculated at 0. The median value mainly indicates that 50% of the IPO companies are having returns higher than 53.78%, while the overall 50% are not achieving the median returns. Moreover, standard deviation of the return provided by the IPO on the initial day is calculated at the levels of 26.15%. This relevantly indicates that risk and return of the IPO is higher in the initial day, which could hamper return generation capability of the investors. Judge et al. (2015) mentioned that investors use the initial valuation of the company to identify the relevant investment options, which could increase their chance to generate higher return from investment. 

The figure relevantly helps in depicting the overall initial return of the companies conducting their IPO. Maximum of the companies on the day of their IPO has made losses, while some of the companies made exponential gains. The inconsistency in the returns of the IPO companies is due the valuation conducted by investors. Kotlar et al. (2017) stated that investor use different valuation method to derive the accurate share price valuation of a company conducting their IPOs. Therefore, the high return generated by some of the companies mainly concealed the losses incurred by companies doing the initial public offering.

Relevant assumptions are made before segregating the companies according to their sector, where the sector with only one company is ignored, as the overall descriptive analysis would not be conducted for the concern sector. The sector with more than one stock is taken into consideration to understand the risk and retune provided from the IPO initiation. The sector such as Consumer staples, Industrials, and Utilities are not evaluated under the descriptive statistics, as they have only one stock and the analysis will not be feasible. The overall descriptive analysis on different GICS sector are depicted as follows.

Sector-wise Analysis

Descriptive analysis of Consumer Discretionary:

Consumer Discretionary

Mean

0.099311

Standard Error

0.018883

Median

0.092083

Mode

#N/A

Standard Deviation

0.037766

Sample Variance

0.001426

Kurtosis

0.371157

Skewness

0.935463

Range

0.086923

Minimum

0.063077

Maximum

0.15

Sum

0.397244

Count

4

From the evaluation of above tables, the overall mean, media, and standard deviation of Consumer Discretionary sector could be identified. The calculation mainly indicates that average return provided by Consumer Discretionary sector is at the levels of 9.93%, while the median returns 9.21% with an observation of 4 companies in the sector. The overall valuation mainly indicates that 50% of the stock falling in Consumer Discretionary sector has provided a return of 9.21% during the initial public offering. Moreover, the standard deviation of the overall sector falls at the only 3.78%, which is relevantly lower than the returns provided by Consumer Discretionary sector. This relevantly indicates that risk involved in the initial public offering of Consumer Discretionary sector is relevantly low and could provide higher return to the investors. Therefore, from the evaluation it could be detected that IPOs conducted by Consumer Discretionary sector could eventually help investor to generate high return from investment (Leitterstorf and Rau 2014).

Descriptive analysis of Financials:

Financials

Mean

0.170175

Standard Error

0.118424

Median

0.099348

Mode

#N/A

Standard Deviation

0.290079

Sample Variance

0.084146

Kurtosis

0.781574

Skewness

1.056729

Range

0.793478

Minimum

-0.12681

Maximum

0.666667

Sum

1.021051

Count

6

The companies taken under valuation of Financials sector is relatively under 6, which is used in identifying the viability of IPO option conducted by companies in the sector. In addition, the overall average returns provided by the IPO companies are at the level of 17.02%, while 50% of the company’s overall return on the day of IPO is higher than 9.93%. The overall standard deviation is mainly at the levels of 29.01%, which is relevantly high in comparison to the return provided by the IPO. The high average returns provided by the Financials sector mainly helps in improving the level of retunes, which could be generated by the investor on the initial public offerings. The high average return also indicates the valuation of financial companies in ASX is relevantly high due to the demand of the investors (Boulton, Smart and Zutter 2017).

Descriptive analysis of Healthcare:

Health Care

Mean

-0.12536

Standard Error

0.143212

Median

-0.005

Mode

#N/A

Standard Deviation

0.286424

Sample Variance

0.082039

Kurtosis

3.66862

Skewness

-1.90205

Range

0.611429

Minimum

-0.55143

Maximum

0.06

Sum

-0.50143

Count

4

The calculation relevantly evaluates mean, median, and standard deviation of Healthcare companies conducting IPO in Australian market. from the overall evaluation it could be identified that the average returns provided by IPO companies is relatively at -12.53%, while 50% of the stocks have achieved returns above -5%. Moreover, standard deviation is at the levels of 28.6%, which is relatively high in comparison to other stocks. The overall returns provided by Healthcare sector is negative, which indicates the demand of investors regarding the stocks of Healthcare companies. Maximum of the companies listed in the healthcare sector is relatively providing negative returns on the day of their IPOs. This relatively indicates that the companies listed in IPO during 2015 under Healthcare sector was not valued according the company’s actual valuation or the investors did not find the company could provide the anticipated returns (Khurana, Ni and Shi 2017).

Consumer Discretionary

Descriptive analysis of Information Technology:

Information Technology

Mean

0.089689

Standard Error

0.055195

Median

0.06621

Mode

#N/A

Standard Deviation

0.135198

Sample Variance

0.018279

Kurtosis

-0.09907

Skewness

0.552859

Range

0.38

Minimum

-0.08

Maximum

0.3

Sum

0.538134

Count

6

After evaluating the descriptive statistics of Information Technology Sector, the overall mean, median, and standard deviation could be identified. Moreover, six companies in the sector mainly conducted the IPO session, which helped in identifying the overall returns provided by the companies. The overall average returns provided by Information Technology is at the levels of 8.96%, which relatively indicates the positive price movement of stocks on the day of IPO. moreover 50% of the stocks listed in Information Technology Sector provided return of more than 6.62%, which is relatively higher and indicates the possibility of increased returns provided by the newly listed company. However, from the valuation the standard deviation is calculated at the levels of 13.51%, which is relatively low in comparison to the returns provided by the information technology stocks. Therefore, it could be understood that successful IPO initiation could be conducted by companies listed in information technology sector (Beck 2017).

Descriptive analysis of Real Estate:

Real Estate

Mean

0.028

Standard Error

0.003

Median

0.028

Mode

#N/A

Standard Deviation

0.004243

Sample Variance

0.000018

Kurtosis

#DIV/0!

Skewness

#DIV/0!

Range

0.006

Minimum

0.025

Maximum

0.031

Sum

0.056

Count

2

The above calculations mainly indicate the overall average returns provided by real estate sector companies are at the levels of 2.8%, where only 2 stocks are evaluated purpose for descriptive analysis. The median value is relatively at the levels of 2.8%, which is common as there are only two stocks included in the evaluation. However, the overall risk involved in price movement of the IPO companies is at the levels of 4.24%. this relatively indicates that real estate sector IPO are conducted effectively in the Australian market.

Descriptive analysis of Telecommunications Services:

Telecommunication Services

Mean

0.350852

Standard Error

0.323472

Median

0.055556

Mode

#N/A

Standard Deviation

0.56027

Sample Variance

0.313902

Kurtosis

#DIV/0!

Skewness

1.712911

Range

0.997

Minimum

0

Maximum

0.997

Sum

1.052556

Count

3

The maximum average returns are calculated from telecommunication service IPOs, while increasing the level of risk involved during the IPO session. the average returns from the telecommunications services IPO is at the levels of 35.08%, while 50% of the stock has the return above 5.56% with an overall standard deviation of 56.02%. This relatively indicates that risk involved in IPOs of Telecommunication service companies is relatively higher than any other sector, which is evaluated in the assessment.

ASX Code

Company Name

Adjusted trading close price

Price after 2 years

Holding period return

AER

Aeeris Ltd

0.23

 0.068

-70.43%

FFT

Future Fibre Technologies Limited

0.83

 0.120

-85.54%

MUA

Mitula Group Limited

0.8

 1.010

26.25%

MYO

MYOB Group Limited

3.89

 3.590

-7.71%

PPL

Pureprofile Ltd

0.5

  0.330

-34.00%

RFN

Reffind Limited

0.26

  0.010

-96.15%

^AORD

All Ordinary Index

5,869.700

 5,773.900

-1.63%

 From the overall evaluation of the above figure and table, two year holding period return of the IPOs can be calculated for the information technology sector companies. This relatively indicates that the overall returns provided by the Information Technology Sector is negative, as 5 out of 6 companies has provided negative returns during the 2-year holding period. However, the evaluation of all ordinary index also indicates a decline of only -1.63%, which relatively indicates the problems related to the investment during IPOs (Wales, Mousa and Stein 2015).

Financials

Therefore, it could be understood that conducting investments during the IPO initiation is not advisable to the investor, after evaluating the overall track record. On the day of IPOs, volatility in stock is relatively high, where the accurate prices for the particular company is not identified. After the IPO initiation progress of the company is evaluated by the investors, which helps in deriving the actual prices of the company and he prices investors are willing to pay. Moreover, the 2-year holding period evaluation also indicated a loss incurred by investors who traded on the day of the IPO. Hence, the investor needs to find more information on the company before investing and ignore the investment process on the day of IPO (Francis 2017).

From the overall evaluation in short run IPO underpricing can be identified by evaluating different empirical research, as it helps in gauging into the reasons behind the occurrence of short run IPO underpricing. In addition, IPO underpricing is mainly conducted when the increase in stock value from the initial offering price is seen after the successful completion of the first day trading. This relevantly indicates that underpriced IPOs provide adequate potential to the investors for generating higher returns from investment on the first trading day. The empirical research paper mainly used for evaluating the implication of IPO underpricing, which is conducted in UK. The research paper completed by Unlu, Ferris and Noronha in 2004 relatively evaluates the IPO underpricing overtime in evident to UK. Research paper adequately evaluates the performance of IPOs after the completion of 1st day trading, while detecting the possibility of short run and Uprising occurrence on IPOs. In this context, Filatotchev, Chahine and Bruton (2016) mentioned that investors conduct company analysis to identify the actual share value, which might help in generating higher rate of return from investment.

The empirical research paper relatively evaluates the initial public offerings using 513 IPOs launched in UK from 1993 to 2001. From the overall evaluation of the research paper it could be identified that underpricing of IPOs has relatively increased from 7% to 15%. the research paper relatively evaluates the impact of different factors in conducting the underpricing of a particular IPO on the day of its initiation. the research paper relevantly demonstrate how analyst coverage and media reporting could be used by companies who are conducting the initial public offering in UK. The presence of underpricing during the IPO is relatively evident, where that valuation of a particular stock changes with the performance of the company (Unlu, Ferris and Noronha 2004).

Healthcare

The empirical results used in the research relatively uses time series analysis of enterprising, multivariate analysis of underpricing, underpricing and firm’s characteristics to identify the overall change in closing price of the IPO. The comparative time series of Mean (Median) is relatively conducted in the research to identify the change in underpricing of IPOs in the UK market. The calculation relatively indicates that the underpricing percentage relatively increased to 64.5% in 2000, which increased from 3.2% in 1994. This relatively indicates that the underpricing of a particular IPO relatively increased during 2000, as more and more companies who are commencing the initial public offering. the post issuance value relatively increased during the process, which indicated that money left on the table was relatively higher, while it allowed the investors to generate a higher return from investment (Unlu, Ferris and Noronha 2004).

The empirical research also evaluates that underwriter prestige as it is considered to be one of the major factors behind underpricing of a particular IPO. Moreover, it is detected that Low Prestige of underwriters relatively increases the underpricing of a particular IPO in UK. Therefore, it could be understood that companies that appoint high rank underwriters for their IPO initiation are able to reduce the level of underpricing conducted during the IPO commencement. The overall mean underpricing categories are conducted to characterize the IPO, which helps in determining the different level of characteristics, which could influence the overall underpricing of a particular IPO. From the overall evaluation process of small industry, having technological front, where no secondary sales are conducted and has low prestige underwriters are identified to have the highest underpricing impact (Unlu, Ferris and Noronha 2004).

The multivariate analysis is relatively used to evaluate the underpricing impact on IPS, which was issued in UK from 1993 to 2003. The multivariate analysis relatively evaluates the intercept of different segments for identifying the overall impact of underpricing on the IPOs. the evaluation indicates that from the sub period of 1996 to 2001 the overall underpricing percentage relatively increased in UK due to the continuous IPOs, which was initiated by companies in the UK market. Researcher relatively indicates that underpricing of a particular IPO is conducted for a short duration, where the investors are able to generate higher returns from investment. After evaluating the UK IPOs from 1993 to 2003 the impact of short term underpricing can be identified in the UK market (Unlu, Ferris and Noronha 2004). Hence, it could be understood that both us and Australian economy have the underpricing mechanism for IPOs, as it allows investors to increase their returns from investment. Therefore, underwriters and characteristics of the company could be identified, as the main reasons behind the occurrence of short run IPO underpricing. Due to the adoption of low-grade underwriters during the IPO process negative impact of underpricing on the share are conducted. Henceforth, it could be assumed that Australia and US both has the short-run IPO under-pricing conduction in their stock market.

Information Technology

Reference and Bibliography:

Au.finance.yahoo.com. (2018). ^AORD Historical prices | ALL ORDINARIES Stock - Yahoo Finance. [online] Available at: https://au.finance.yahoo.com/quote/%5EAORD/history?period1=1427826600&period2=1501439400&interval=1d&filter=history&frequency=1d [Accessed 26 Apr. 2018].

Bajo, E. and Raimondo, C., 2017. Media sentiment and IPO underpricing. Journal of Corporate Finance, 46, pp.139-153.

Beck, J., 2017. Determinants of IPO Underpricing: Tech vs Non-Tech Industries. Major Themes in Economics, 19(1), pp.39-55.

Boulton, T.J., Smart, S.B. and Zutter, C.J., 2017. Conservatism and international IPO underpricing. Journal of International Business Studies, 48(6), pp.763-785.

Bouzouita, N., Gajewski, J.F. and Gresse, C., 2015. Liquidity benefits from IPO underpricing: ownership dispersion or information effect. Financial Management, 44(4), pp.785-810.

Brau, J.C., Cicon, J. and McQueen, G., 2016. Soft strategic information and IPO underpricing. Journal of Behavioral Finance, 17(1), pp.1-17.

Daniel, S.G.H., 2017. An Empirical Investigation of the IPO Underpricing Phenomenon: Evidence from the Singapore IPO Market (Doctoral dissertation).

Datanalysis.morningstar.com.au.ezproxy-b.deakin.edu.au. (2018). Shibboleth Authentication Request. [online] Available at: https://datanalysis.morningstar.com.au.ezproxy-b.deakin.edu.au/af/company/pricehistory-dailyadj?glossaryPage=company%2Fpricehistory&ASXCode=RFN&xtm-licensee=datpremium&page=1&resultsperpage=50&xsl_start_date=2017-07-09&xsl_end_date=2017-07-12&xsl_frequence=Daily&xsl_type=Adjusted&xsl-graphtype=tr10&active=PRC_Sec1 [Accessed 26 Apr. 2018].

Filatotchev, I., Chahine, S. and Bruton, G.D., 2016. Board interlocks and initial public offering performance in the United States and the United Kingdom: An institutional perspective. Journal of Management, p.0149206315621145.

Francis, B., 2017. The Information Environment of the Firm and IPO Underpricing (Doctoral dissertation, Rensselaer Polytechnic Institute).

Fung, S.Y.K., Gul, F.A. and Radhakrishnan, S., 2014. Investment banks' entry into new IPO markets and IPO underpricing. Management science, 60(5), pp.1297-1316.

Judge, W.Q., Witt, M.A., Zattoni, A., Talaulicar, T., Chen, J.J., Lewellyn, K., Hu, H.W., Shukla, D., Bell, R.G., Gabrielsson, J. and Lopez, F., 2015. Corporate governance and IPO underpricing in a cross?national sample: A multilevel knowledge?based view. Strategic Management Journal, 36(8), pp.1174-1185.

Khurana, I., Ni, C. and Shi, C., 2017. The Role of Big 4 Auditors in the Global Primary Market: Does Audit Quality Matter Most When Investors Are Protected Least?. Working Paper. University of Missouri.

Kotlar, J., Signori, A., De Massis, A. and Vismara, S., 2017. Financial wealth, socioemotional wealth and IPO underpricing in family firms: A two-stage gamble model. Academy of Management Journal, pp.amj-2016.

Leitterstorf, M.P. and Rau, S.B., 2014. Socioemotional wealth and IPO underpricing of family firms. Strategic Management Journal, 35(5), pp.751-760.

Morricone, S., Munari, F., Oriani, R. and De Rassenfosse, G., 2017. Commercialization Strategy and IPO Underpricing. Research Policy, 46(6), pp.1133-1141.

Park, H.D. and Patel, P.C., 2015. How does ambiguity influence IPO underpricing? The role of the signalling environment. Journal of Management Studies, 52(6), pp.796-818.

Qiming, T., Hui, C. and Li, M., 2017. Did the Price Limits Change the Reaction Pattern of the IPO Underpricing. Quarterly Journal of Finance, 2, p.004.

Unlu, E., Ferris, S.P. and Noronha, G., 2004. IPO underpricing over time: evidence from the UK. Applied Economics Letters, 11(1), pp.5-9.

Wales, B., Mousa, F.T. and Stein, C.M., 2015. Examining Affective and Cognitive Discourse at the Time of IPO: Effects on Underpricing. In Academy of Management Proceedings(Vol. 2015, No. 1, p. 14373). Briarcliff Manor, NY 10510: Academy of Management.

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