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The Benefits and Asymmetry of Information in IPOs


Discuss About The Social Motional Wealth IPO Underprice Firms?

There are several motivations along with benefits for different issuers behind the IPO (Initial Public Offering) procedure. Essentially, there exists considerable asymmetry in information between different issuers and at the same time financiers at specifically the Initial Public Offering (IPO). Leitterstorf & Rau (2014) mentioned that there remained no news as regards issuing corporations in the media till one year prior to the date of issue. However, in case of Initial Public Offering (IPO), normally there remains very slight information regarding the private corporation that is obtainable to the public. Particularly, financiers have to depend mainly on the financial assertions presented in the offering projection that provides the issuers along with the underwriters proper incentive to report desirable accounting figures. Thus, this direct the way towards to the consideration that issuing corporations have enhancements in profitability prior to the process of offering and reduction in overall profitability after the process of offering. Judge et al., (2015) examined hypothesis on earnings management and discovered that issuers enhance earnings comparative to flows of cash before the initial public offering IPO.

Numerous papers have evaluated the long-run presentation of Initial Public Offerings (IPO). In essence these prior studies have appropriately examined returns on stock along with operational performance after corporations become public. However, all these types of studies presented have reflected that initial public offering corporations present comparatively less amount of profitability as related to corporations that are not public (Fung et al., 2014). As such, IPO is essentially a first-time deliverance of shares by a particular corporation to the entire public. Fundamentally, the judgment for private corporations to become public can be considered one of the most elementary decisions that the firm encounters. Primarily, it is the pronouncement that alters the entire framework of the corporation and in several cases it split up with the power of ownership being shifted and withdrawn from the original owner of the company. Nevertheless, it cannot be considered to be surprising then that topic of IPO has drawn attention of diverse scholars, financiers, along with decision makers. As a result, a huge number of prior reports have been carried out on this specific topic of IPO topic, and it has been developing at swifter speed in current years (Boulton et al., 2017).

Regarding returns of stock, evaluation has disclosed that financiers seem to acquire losses owing to holding shares in the corporations that have of late undertaken an IPO as compared to individuals that have not carried out so. However, the stratagem of investing money in initial public offerings at the close of the initial day of community trading and retaining them for three consecutive years can generate a wealth of around 83% in comparison to that acquired by putting in money during the similar period in a particular set of control corporations belonging to the similar sector and with a linked value of the market. Morricone et al., (2017) recommends that these small long-run proceeds of Initial Public Offerings (IPO) are corresponding to the going public of several corporations coinciding with the subsistence of a pertinent interest in specific segments. This refers to the fact that financiers might be regularly over-optimistic as regards the possible profits of novel corporations. Numerous studies have referred to the subsistence of depressing long-run abnormal returns on stock for corporations at five years subsequent to the Initial Public Offering. Essentially, this occurrence has been described in both the USA as well as other marketplace. Of late, research papers have reflected that underperformance for long-run fades away after tracking as well as monitoring for the features or risk related to Initial Public Offering corporations. Nielsson & Wójcik (2016) recommends that returns on IPO are identical to diverse non-issuing corporation returns harmonized to size together with the ratios on book-to-market. In addition to this, Liu et al., (2014) reflects that abnormal returns earned on IPO reveals lower exposures of risk owing to both low level of leverage along with higher amount of liquidity.

Long-Run Performance of IPOs

As rightly put forward by Butler et al., (2014), there exists huge number of effective approaches for the reduction in the post issue operating performance of different IPO corporations. As one of the approaches is associated to probable enhanced costs of agency at the time when a corporation carries out the transition of ownership from necessarily private to public firms. In addition to this, scholars are also of the view that a second cause can be that the attempt of the managers’ windowdress accounting figures before becoming public. However, the third description, in line with them, for the reduction in operational performance is that industrialists time their specific issues in a bid to match with periods of different strangely good levels of performance.

Becoming public naturally directs the way towards a considerable alteration in the overall ownership framework of the company. Again, reduction in ownership level of administration as a consequence of going public can direct the way towards agency problem as elucidated  by (Walker et al., 2015). As mentioned by Darmadi & Gunawan (2013), there are incentives of the management for the firm alteration whenever there are novel investors. Again, the interests of administrators as well as shareholders deviate as stakes of manager decline and rights get scattered.

As per the agency supposition, low ownership preservation by different managers raises incentives of managers to embark on different non-value maximizing schemes and to augment consumption. Conversely, retention of superior stake of ownership in the corporation could alleviate the agency problem. As such, this conversation means that there can be such an anticipation that the post-issue operational performance can reduce. In order to describe the reduction in the post-issue operational performance, there are certain associates that utilize the agency theory whilst other associates insist that accounts founded on agency theory are not effectual (Darmadi & Gunawan, 2013).

An effectual description for the reduction in the post-issue operational performance is essentially the time of offering. Essentially, issuers also time different issues to match up with periods of oddly good levels of performance that they know cannot be continued in the upcoming period. Therefore issuers acquire advantage of different impermanent enhancements in performance to issue novel shares at the time when financiers have excessively optimistic anticipations regarding the corporation’s future projections. In essence, this can be documented as window of predictions. Thus, scholars reached the conclusion that issuers acquire the benefit of windows of chances (Walker et al., 2015).

Causes of Post-Issue Operational Performance Reduction

The current study can provide directives to different financiers to augment their comprehension of behaviour regarding prices of share after initial public offering. However, this can help the financiers in arriving feasible decisions whilst investing in share bourse (Darmadi & Gunawan, 2013).


In essence, various market regulators specifically can acquire knowledge regarding the manner it is important to manage all the handle future IPO that involves different regulations as well as framing of strategies (Darmadi & Gunawan, 2013). Owing to various sound set of laws as well as strategies, this can lead to augmented confidence in financiers in investing in specific stock bourse.

Listed Firms

The corporations can understand the fundamentals as regards the performance of initial public offering. Furthermore, this can help them in arriving good decisions regarding when to float own shares by means of initial public offering (IPO) (Darmadi & Gunawan, 2013). Essentially, this can help them in making feasible decisions at the time of establishing the offer price of different shares during the process of initial public offering.

The information hereby gathered can be said to be very helpful for upcoming researchers who intend to move ahead with the knowledge along with literature in the values of the market after the initial public offerings (Butler et al., 2014). However, it is also expected to enhance the existing literature on specific subject as indication material and kindle additional research in this specific area.

A general description for the irregular first-day behaviour of price is known as “winner’s curse”. Liu et al., (2014) is a representation of the IPO market that comprises of two different types of financiers that include well-informed financiers that have t5he adequate knowledge regarding the true value of issue along with less-informed financiers who have inadequate exceptional knowledge for correcting issue value. Essentially, this specific asymmetry in information creates a “lemons problem” in which the uninformed financiers are left with the comparatively less flourishing IPOs. However, in a bid to maintain badly informed financiers interested in specific IPO, issuing firms have the requirement to sell with a discount. As such, an explanatory factor openly derived from this curse of the winner is necessarily the size of the issue. Again, larger the issue the more competently can it be handled and the supplementary information regarding the true value can be made available. Particularly, wider stretch of information reduces the information asymmetry among financiers. Owing to this, the lower information irregularity, the larger IPOs have lesser cause to under price and are anticipated to illustrate lower preliminary outperformance. Essentially, this theory does not illustrate the long run presentation of Initial Public Offering.

Implications for Investors, Regulators, and Listed Firms

Different theories have been suggested to illustrate the overall phenomenon of the underperformance in the long run of different IPOs. Liu et al., (2014) offers an illustration founded on alterations on alterations in different divergences of views among the financiers. According to Nielsson & Wójcik (2016), initial public offering are normally subscribed by different financiers of the corporation who are necessarily regarded as the most optimistic as regards the issue as well as prices that are established by the specific group rather than the appraisal of the typical financiers. Further, the greater the level of uncertainty regarding the IPO value, the more is the price that the optimistic financiers are willing to pay relative to different pessimistic financiers.

Nielsson & Wójcik (2016) analytically evaluates the overall extent of underpricing that presently subsists in the market by evaluating the current data on IPO. Nielsson & Wójcik (2016) asserts that the presence of underpricing in the present IPO market. Essentially, the empirical outcome suggests that financiers that invest their money in IPO can earn on an average 20.25% return on particularly the day of listing. However, the extent of pricing that subsists in the Singaporean market can be considered to be very less as compared to that of the other markets that are existent all around the globe. Essentially, the average size of the offer is relatively higher as per the global standards. As such, this can be regarded as one of the main reasons for the comparatively smaller value of underpricing in the Singaporean market.

Darmadi & Gunawan (2013) presents a study that delivers a discriminating test of two different signalling models that explain the underpricing of specifically initial public offering. Essentially, the empirical outcomes of the study recommends a one-signal equilibrium that is persistent with the particularly the Leland as well as the Pyle’s Model, but which discards the two-signal model of Grinblatt as well as Hwang. Necessarily, the fraction or else the proportion of the equity that essentially the issuer retains in the corporation that in turn is delivered to the public dictates the offering price as a indication for quality of the corporation. As such, a greater fraction of equity refers to better quality of the corporation and thus a lowerex ante uncertainty over the value of the corporation. Financiers therefore need to expect a smaller initial return on particularly the offering (, 2017).

The study of the under pricing of particularly IPO in the Singapore presents a discriminating test of specific information-signalling hypotheses. This study also delivers a discriminating test of two different signalling models that explicates the under pricing of overall IPO. According to Darmadi & Gunawan (2013), Voon did carry out 384 IPO under pricing phenomenon from particularly 1st January 1997 to particularly 22nd August 2008. It was discovered that under pricing in the short run period as well as underperformance in the long run specifically in the regional market. However, the findings suggest that the high level of reputation of particular issue manager can be associated to short run under pricing. On the whole, the overall reputation of the issue manager can be considered to the significant to that of the return of the performance of the IPO.

Winner's Curse and Size of Issue

The study on the long term performance of particularly IPOs reflects the evidences from specifically the Singaporean market. According to Darmadi & Gunawan (2013) stock markets form an important part of the capitalist economic system since they pull together those that are in need of different capital and those having excessive capital for investment. Particularly, the initial public offerings of diverse corporations that had share capital that were previously privately held delivers a chance. The IPO procedures essentially involves due diligence along with pricing by different underwriters, following which they necessarily underwrite the entire issue and thereafter sell the same to different financiers in specifically the primary market.  Thus, after the initial public offering, the shares of the corporations get traded in particularly the secondary market till the firm gets winded up or else get merged with other corporations or else get acquired. Besides this IPO, corporations that are already operating as public can also get engaged in the process of raising of capital by undertaking different stock offering that financiers can utilize as investment vehicles to raise the overall returns on the portfolio.  The study suggests that the traditional theory on finance suggests that individual financiers have the need to adopt a particular buy as well as hold strategy stratagem for the purpose of carrying out investments in essentially the stock market as they are incapable of timing the market and as the efficient market hypotheses recommends that all available information can be incorporated in prices of stock.  However, a question is raised regarding whether long term buy as well as hold strategy can be considered to be a profitable investment strategy in case of specifically the IPO (asset class) for different individual investors (Leitterstorf & Rau, 2014). However, as per the critical assessment of the literature, the answer obtained to this question raised is no. Nevertheless, there are various variations in the outcomes based on the manner the comparison index get selected and what market is studied. Essentially, financiers might also be able to adopt a winning portfolio of specifically buy as well as hold in investments of IPO in case if they can successfully forecast what facets direct the way towards strong or else weak performance of price in the area of IPO. Thus, this study intends to gather all the prior studies on the subject and apply the entire learning to the market of Singapore. The identification of ex-post that involves factors that direct the way towards success of IPO might probably help the financiers lessen the overall risk and at the same time earn higher returns whilst developing ex-ante strategies of investment.

Theories of Underperformance in the Long Run

However, Walker et al., (2015) discovered that corporate governance exert overall impact on the performance as well as share return of corporate. In this study, the quantitative evaluation is based on the IPOs that are listed in particularly Singapore for essentially the period 2000 to 2007. Critical analysis of this study suggests that the listed IPOs in the main board specifically perform better than the ones that are listed particularly the secondary board. Nonetheless, there exists no evidence that can substantiate the overall association between the performance of the IPOs and the practices associated to corporate governance especially at the time when the CGI is utilized as a proxy for quality of disclosures of corporate governance. Likewise, there exists no evidence that can substantiate the existence of considerable association between engagement of different venture capitalists and the performance of IPO (Judge et al., 2015). Additionally, this study also does not support the declaration that issuers especially having longer lock up period show low level of under pricing along with better long term performance. Nevertheless, at the when particular variables of the board namely size of the board, duality of the CEO, independence of the board, diversity of gender as well as family directorship are tested, the observations reflect that a positive association between particularly the lock up period and the performance in the long run. Additionally, this study suggests a considerable association between under pricing of IPO with the family directorship.

The statutory body operating In Malaysia was accountable for the investment as well as new listing of corporations at stock exchange and that is referred to as Malaysian Stock Exchange (MSE). However, prior to alterations, the name stated on 14th April 2004, this stock exchange operating in Malaysia is referred to as Kuala Lumpur Stock Exchange (KLSE) incorporated on 14th December during the year 1976. Essentially, MSE comprises of 3 boards that include Main Board, The Malaysian Exchange of Securities Dealing and Quotation Berhad (MESDAQ) as well as Second Board (Leitterstorf & Rau, 2014). In particular, the Main Board delivered for larger capitalized corporations while smaller firms will ask to be listed on specifically the Second Board. However, MESDAQ was delivered for high rate of growth and technology firms in a bid to raise capital. During the period August 2009, the Main as well as Second Boards amalgamated and were renamed as the Main Market. In addition to this, the MESDAQ board was again named as the ACE Market that stands for the acronym "Access, Certainty, Efficiency." As such, the primary objective of the ACE Market is to deliver higher level of certainty along with efficiency in the process of listing and to craft it easier for specific issuers aimed at tapping the entire capital market. However, the ACE Market can be considered as a sponsor-driven market that is essentially open to firms of diverse sizes and firms from different sectors. As such, the financiers, majority of them being investment bankers, evaluate the appropriateness of applicants looking for listing, carry out due diligence procedure for the ACE Market firms’ documents and at the same time maintain normal contact with diverse firms for in any case three years after process of listing in association with the new structure of market, Bursa Malaysia also refurbished its listing necessities for the Main Market as well as the ACE Market. An important reform to particularly the ACE Market, besides its feature of sponsor-driven framework and open to different companies of different sizes from diverse sectors, is that there exists no agreed minimum operational history or else profit track evidence necessity for entry into this specific market. As such, this facet empowers the financiers to evaluate the appropriateness of different listing applicants. In essence, there is substantial of IPO under pricing in several developed as well as promising markets (, 2017). However, under pricing takes place at the time when the agreed-upon offer price of the firm is lower than the market price at the end of the first day of trading. In essence, empirical observations reflect that IPOs was undoubtedly underpriced during the period of initial trading in particularly Malaysia. The important study that intends to enumerate performance of IPO under pricing in specifically Malaysia founded on initial return. Data acquired on IPOs during the period 1978-1984 reflect that IPOs in Malaysia was essentially underpriced (, 2017).  

According to the study on under pricing performance of IPO (listed particularly in the main market) in particularly Malaysia, the overall performance of the entire market reflected a positive return that is essentially a high return during the year 2013. This result of the study is particularly consistent with the prior Malaysian studies. The observations of essentially the initial market adjusted returns reflect that the IPO corporations are considerably underpriced. As per the study, throughout the years yield can be observed to be positive for particularly IPOs on necessarily the first trading day. Thus, the loyalty of financiers into different IPO corporations can be considered to be significant in particularly determined superior performance of IPO. Essentially, IPOs in particularly in Malaysia are related to high under pricing. Nevertheless, this study discovered that high level of under pricing in the initial trading is not ascertained weak performance in essentially 4 years after issuance of IPO shares. However, this study helps in understanding the under pricing of IPO in Malaysia main market and helps in investigation of the impact of performance of the corporations into different degrees of under pricing of IPO (, 2017).


Analysis of prior literature reveals both the short term as well as long term performance of IPO in the market of Malaysia. Again, another study shows that existence of a positive association between particularly under pricing and size of IPO, volatility in market, status of underwriter and inverse of the IPO price. Essentially, after getting listed in public, under pricing was discovered to underperform in the period of three years.


Boulton, T. J., Smart, S. B., & Zutter, C. J. (2017). Conservatism and international IPO underpricing. Journal of International Business Studies, 1-23.

Butler, A. W., Keefe, M. O. C., & Kieschnick, R. (2014). Robust determinants of IPO underpricing and their implications for IPO research. Journal of Corporate Finance, 27, 367-383.

Darmadi, S., & Gunawan, R. (2013). Underpricing, board structure, and ownership: An empirical examination of Indonesian IPO firms. Managerial Finance, 39(2), 181-200.

Fung, S. Y. K., Gul, F. A., & Radhakrishnan, S. (2014). Investment banks' entry into new IPO markets and IPO underpricing. Management science, 60(5), 1297-1316. (2017). Retrieved 30 September 2017, from

Judge, W. Q., Witt, M. A., Zattoni, A., Talaulicar, T., Chen, J. J., Lewellyn, K., ... & Yamak, S. (2015). Corporate governance and IPO underpricing in a cross?national sample: A multilevel knowledge?based view. Strategic Management Journal, 36(8), 1174-1185.

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

Liu, L. X., Sherman, A. E., & Zhang, Y. (2014). An Attention Model of IPO Underpricing, With Evidence on Media Coverage. Technical Report. DePaul University.

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

Nielsson, U., & Wójcik, D. (2016). Proximity and IPO underpricing. Journal of Corporate Finance, 38, 92-105. (2017). Retrieved 30 September 2017, from

Walker, T., Turtle, H. J., Pukthuanthong, K., & Thiengtham, D. (2015). Legal opportunism, litigation risk, and IPO underpricing. Journal of Business Research, 68(2), 326-340.

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