Ipo Underpricing Case Study

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Title: Strategic IPO underpricing: The UK evidence
Introduction:
IPO is a method for companies to raise expansion capital, however, it is also used by insiders as a tool to maximise their personal wealth. According to the theory developed by Aggarwal et al. (2002), managers underprice IPOs on purpose to raise higher profit from selling stocks at the expiration date. The IPOs that are underpriced on the first day attract the attention of the analysts therefore generate information momentum and change the demanding curve of the stock. The generated information momentum change the share price to peak around the expiration date which allow the managers to maximise their personal wealth through selling shares.
The main purpose of this dissertation …show more content…

Secondly, as one of the most well developed stock market, UK market locates in the similar developing stage as US market does, adequate data ensure the reliability of the research. Finally, both USA and UK market play a critical role in modern financial system, experience from these two markets could be contributive.
According to previous study on IPO underpricing in UK market, some analysts used different theory to explain this phenomenon but information momentum theory has never been adopted. Based on the data for UK market during the period between 2005 and 2014, this dissertation will use information momentum theory to explain the existence of IPO underpricing …show more content…

uncertainty about the value per share. And this uncertainty is positive correlated with IPO underpricing. Johnson and Miller (1988) test and prove this theory again. Ljungqvist et al. (2006) propose that issuer prefer to sale their IPO to regular investors. A group of people do help in both maintain share price and extract extra value from sentiment investors. As they would expect inventory loss from the ceasing of sentimental demand, the profit from underpriced IPO is distributed as a compensation to cover this potential

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