Analysis of Initial Public Offerings (IPOs)

This assignment requires in-depth research and analysis on Initial Public Offerings (IPOs), covering topics such as underpricing, market conditions, financial statement analysis, and valuation methods. It includes a list of relevant papers, articles, and studies related to IPOs, providing a solid foundation for students to understand the complexities of this financial phenomenon.

DISSERTATION

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Background of research topic......................................................................................................1
Development of theories..............................................................................................................2
Why topic is important................................................................................................................2
Research question........................................................................................................................2
Research objectives.....................................................................................................................3
Structure of project......................................................................................................................3
CHAPTER 2: LITERAGTURE REVIEW......................................................................................4
CHAPTER 3: RESEARCH METHODOLOGY...........................................................................15
Research introduction................................................................................................................15
Research approach.....................................................................................................................15
Research design.........................................................................................................................16
Research philosophy..................................................................................................................16
Data collection...........................................................................................................................17
Data analysis..............................................................................................................................17
Ethics.........................................................................................................................................17
Research limitation....................................................................................................................17
REFERENCES..............................................................................................................................18

INTRODUCTION
Background of research topic
Equity is one of the major source of finance for the firms specially for those who intends
to carry out large size projects. Every year number of firms raised huge amount of capital
through equity. In order to issue shares in the market firms needs to launch IPO in primary
market. There are number of theoires and techniques that are taken in to consideration for IPO
valuation. Usually, firms takes an assistance from the investment banker for determining price of
shares that will be issued during IPO process. It can be said that equity is one major source of
finance for the firms. Equity valuation is one of the complex topic and lots of discusion is
carried out on same. In past time period many researches are conducted in respect to hot and
cold market period. In these researches it is identified that during hot market higher percentage
of return is gained. Whereas, during cold market time period low return is gained. In research
industries stocks were taken that are cyclical, defensive, growth and sensitive in nature. In case
of cyclical IPO it was observed that market average rate of return was 47% in hot market but
same was 3.5% in cold market. This return is related to first day when IPO was launched. In case
of first week criteria of comparison it is identified that in cold market period return of 8.5% and
same in case of hot market period was 48.1%. In case of first month time period in case cyclical
stock it is identified that in hot market there is return of 58% and same in case of cold market is -
0.1%. So, it is clear from facts and figures that in case of hot market very huge amount of return
is earned but in case of cold market very low rate of return is made. Thus, it can be said that
there are some factors which lead to earning of less amount of return in cold market and high
return in hot market. In the current research study hot and cold market related information will
be taken in to consideration for IPO valuation purpose.
In the current report IPO valuation is done and in this regard PE ratio method is used.
This is because it is considered as one of the most important method for equity valuation. Under
PE ratio it is identified whether shares are undervalued or overvalued. In this regard usually firm
price earning ratio is compared to industry PE ratio and on this basis it is identified whether
shares are undervalued or overvalued. In current research study also price earning ratio method is
used for equity valuation. In this regard secondary data will be gathered and firm price earning
ratio will be computed. Similalry, industry price earning ratio will also be computed and in this
regard relevant firm peer companies price earning ratio will be taken in to account and same will
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be used to measure value of price earning ratio of industry. Thus, it is one of more balanced
approach because in same industry and company PE ratio is compared and on basis of
comparison it is identified whether shares are overvalued or undervalued. Apart from this,
qulitative analysis will also be done in the report along with quantitative analysis. In this regard
interview of experts will be taken and on basis of same it will be identified whether during cold
season or hot season issue of IPO remain successful.
Development of theories
In the present research study relevant theories in respect to IPO valuation and relevant
areas will be discussed in detail in literature review section. In this regard hot and cold market
theory as well as underwriter hypothesis theory will be discussed in detail.
Why topic is important Academically: Academically this theory is important because this research report will
help academicicans in understanding the factors that play big role in making any IPO
successful or failed. Scholars and researchers will benefit a lot from present research
study. In terms of business perspective: Business firms will come to know about timing when
they must launch IPO in the market. Timing factor play a very important role in making
any IPO successful or failed and in current research study it will be identified that when
IPO must be launched in the market. Hence, due to this reason current research study will
prove helpful for individuals. In respect to Hong Kong business firms: This research study is very beenficial for Hong
Kong business firms. This is because in present research study only Hong Kong related
firm will be considered. Conditions may very from country to country but within nation it
remain same. Hence, in respect to Hong Kong business firms research study will be
relevant because mentioned nation firm is taken in to account in present reseearch study.
Research question
 What is the impact of underwriter reputation on performance of IPO?
 Which of valuation method is appropriate?
 What was the valuation of IPO at time of issue and their performance after launching in
secondary market?
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Research objectives
Resarch aim
 To identify factors affecting IPO performance.
Resarch objetives
 To find out impact of underwriter reputation on performance of IPO.
 To access different IPO valuation models and their effectiveness.
 To explore valuation of IPO at time of issue and their performance after launching in
secondary market.
Structure of project Introduction: In this seciton of the report detail information about project will be given.
Approaches that will be used in present research study is determined and along with this
different aspects of research study are discusseed in detail. Literature review: In this section of the report different aspects of the research study is
disucssed in detail. Views of different authors will be critically reviewed in detail. Thus,
it is one of the most important part of research study. Research methdology: In this section of the report approaches and techniques that will be
followed for conducting present research study will be discussed. This is the one of the
most important part of research because in this way in which research will be carried out
will be outlined. Data analysis: In this section of the report facts and figures will be analyzed in detail.
Secondary data will be gathered in present research study and same will be analyzed by
using price earning ratio method. It can be said that it is the part on the basis of which
other sections will be prepared. Discussion, Conclusion and recommendation section: In this section of the report data
analyzed will be discussed in detail and reveiwed and this will lead to development of
conbclusion and recommendation seciton of report.
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CHAPTER 2: LITERAGTURE REVIEW
Literature review
Rock (1986) developed a popular model for the theoretical analysis of the underprice of IPO. It
suggests that information asymmetry of market participants causes underpricing. Regarding to a
part of market participants and investors possessing superior information, Rock believes that
investors are classified into two types: informed investors and uninformed investors.
Informed investors are given more information while list uninformed investors are given higher
probability of having bad IPO information. Also, the former ones compete for good IPOs with
the latter. This results in an adverse selection mechanism. Oversubscriptions for those good IPOs
are to be seen while there is an excess supply for the bad IPOs. Since there is an oversubscription
of the good IPO, the shares of the IPO are allocated through rationing. Informed investors are
able to differentiate the quality of the IPO at an early stage. Therefore they are able to subscribe
the IPO they wanted. On the contrary, uninformed investors receive disproportionate levels of
bad IPO.
In conclusion, this is called the Winner Curse. According to Rock, in order to induce uninformed
investors to participate, issuers have to underprice their IPOs.
1.1.1 The underwriter reputation hypothesis
In the following part, I am going to introduce Baron’s (1982) underwriter reputation hypothesis.
This hypothesis stands with Rock’s assumption of asymmetric information but on top of it,
Baron suggests this assumption exists among market participants and investment bankers only.
The reason that Baron believes that the asymmetric information happens among market
participants and investment bankers is that they have superior information to that of the issuers
and investors. What he focuses on is the optimal behavior of issuers as the principals and at the
same time investment bankers as the agent in executing the IPO. Baron’s model not only
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explains how new issues are underpriced but also demonstrates a positive demand for investment
bank advice and distribution service. Although the model provides contribution to the
underwriter reputation model, there are no empirical evidence to support the proposition as it
does not consider the role of underwriter reputation.
Logue(1973) proposes that there is a negative relation between the underwriter reputation and
the degree of underpricing basing on 250 US IPOs from 1965-1969. His research is about the
effect of the underwriter reputation of IPO performance.
Beatty and Ritter (1986) suggest that investment bankers promoted the underpricing equilibrium.
They believe that issuers are not able to make credible commitment on their own. Investment
bankers should be hired to assist the company to make public offering. This creates a role for
investment bankers in the underpricing equilibrium.
There are three necessary conditions for an investment bank to enforce the underpricing
equilibrium.
First, investment bankers are uncertain about the market price of the IPO after listing. Also, they
can earn a return based on their non-salvage reputation. As investment bankers are prone to lose
their earning, should they not risk by cheating underpricing too large or too little. The literature
suggests the last two conditions are the standard conditions on reputation and product.
According to Beatty and Ritter (1986), investment bankers should be willing to not to behave
opportunistically in order not to put their good reputation at stake. The literature proposes that if
an investment banker cheats, he shall lose his clients, issuers and investors.
It is called pricing ‘off-line’ when underwriters have a larger average residual than standard. In
opposite, underwriters that have less average residual, are called nonprestigious underwriters and
known as pricing ‘on-line’. Beatty and Ritter tested the hypothesis through using the
underwriter’s standardized average residual to measure the reputation. They also looked into the
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changes of the market share of the underwriters following the IPOs. There are empirical
evidence showing the strong support for the proposition.
Studies appear after the appearance of what Beatty and Ritter did. There are reports showing that
there is a negative relationship between the prestige of investment bankers and underpricing. As
in other words, the more prestigious the underwriters are, the underpricing is in a lower degree.
Johnson and Miller(1988) extended their study through suggesting another hypothesis. They
propose that when the ex ante uncertainty is taken into consideration, the prestige of the
investment banker ought not to offer incremental explanation of the degree of underpricing. I
will come back to the methodological of Johnson and Miller later in the essay.
All in all , the underwriter hypothesis propose that the role of investment bankers poses a
significant effect on the underpricing equilibrium. The more prestigious the underwrite, the less
degree of underpricing. Therefore, ‘good’ firms tend to recruit more prestigious underwriter so
as to show their position to investors while prestigious investment bankers lean to select ‘good’
issuers to be sent into the market.
1.2 Hot/Cold market anomaly
The Hot/Cold market anomaly is talking about the related market issue. Ibbotson and Jaffe
(1975) discovered this phenomenon in the US. Not only they saw the hot/cold issues in the
market, they also looked into the relationship between the performance of the new issues in the
certain calendar month and so as the previous month. It shows that at the starting month carries
strong serial dependency. This indicates that the hot issue market is predictable. Investment
bankers often suggest clients to go public during the hot market situation. However, Ibbotson and
Jaffe aimed to maximize the amount of money in hands. Therefore, they both agreed that listing
public during the cold market would be better than the opposite. Investors ought to avoid the
IPOs which follows the cold market and focus on their investment during those months. This
results in bring the greatest premia.
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The study also looked into the relationship among the amount of offerings and IPO returns. They
assumed the level of past returns to be linked to the number of offerings. The insignificant
regressions coefficient is caused by the regression model. As a result, the timing of new issue
offering is not related to the first month performance of the IPO after published.
Their study also shows that there are no relationship between the past market performance and
the new issue returns. The market index cannot be used as a guidance to issuers to select a month
to offer their issues.
Ibbotsib et al. (1994) further extended the study through enlonging the period of study. The
evidence matches the previous study. Ritter tried to use Rock’s implication to further explain the
hot issue. He suggests that the explanation of time series correlation of initial returns can be
shown through the correlation of risk composition of firms going public. This results in a higher
proportion of risky firms going into the market in the given amount of time. The other
explanation lies on the irration of the part of the investors other than the issuers and advisers.
There are times that hot issue markets can emerge when investors are exposed to new issues. At
this time, investors are assumed to be willing to accept a higher price for earnings and market to
book for new issues. As a result, firms go into the market to harvest the receptiveness and get a
better price for their share of offer. According to Byrne and Rees(1994), the optimism of
investors results in aftermarket prices being bid above intrinsic values and high initial returns are
seen.
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1.3 Equity Valuation
Models of equity valuation in the fields of finance literature are normally based on Miller and
Modigliani (1961). Miller and Modigliani (MM) state that the market value of a company
common equity is equal to the discounted value for present and future earnings. After MM's
model, the issue of equity valuation is being more important regarding to academia and practice.
Most of finance textbooks discuss some models for valuation, for example, the comparable firm
approach, the discounted cash flow (DCF) approach, and the asset-based approach (Benninga
and Sarig, 1997). The comparable firm approach implement capitalizing earning per share (EPS)
of the company under consideration at the average or median price earnings (P/E) ratio in
comparable firms. The DCF approach is kind of based on the MM model, which uses the future
cash flow and applies discount rate to the market value of a company. The asset-based approach
is going to look at the underlying value of the company's assets to determine the value.
1.3.1 IPO valuation
Because of not much available information in the market before listing, the DCF methods are
relatively not very useful. Normally, the prospectuses only disclose 3 years of financial reports
that is not enough for forecasts of appropriate future cash flow. Moreover, IPO companies may
be typically young but with high future growth rate, which will be more difficult to determine the
suitable discount rate.
Moreover, the other valuation method is the comparable company methods. According to
McCarthy (1999), it is the very common method to issuers and sponsors to set IPO offer price.
Kim and Ritter also state the usefulness of this method to valuation of IPOs. First of all, they use
price-earnings ratios (PE Ratio) as a denominator to an IPO market price. This result is poor
when using historical accounting numbers. But, the accuracy of IPO valuation will improve
much better when using forecast earnings. Additionally, they test other multiples, for example,
the market-to-book, enterprise value-to-sales and others. They find that these multiples somehow
are more accurate than using historical accounting.
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Closely relating about previous Kaplan and Ruback's study (1995), Berkam et al. (2000) test the
accuracy of the comparable firm multiples methods and the DCF methods for valuation of IPOs.
Based on set of data from New Zealand Stock' Exchange, they use forecasted or expected
accounting information to both methods. Not surprisingly in accordance with Kaplan & Ruback
(1995), they find that both methods also have similar accuracy of valuation of IPOs. But, the
result is highly depended on the used benchmark. They find that market-based benchmark used
can make more accurate estimation than using the industry-based benchmark.
As previously discussed. The signaling hypothesis is quite significant in the IPO theory. Downes
and Heinkel (1982) looked into the valuation of new equity offerings which is related to indicate
the firm value. They used the US IPO data from 1965-1969 to test the Leland-Pyle Model
(1977). They discovered that firms with higher fractional ownership tend to have higher values
the old shareholders believes in the firms' future value as signaled bt the ownership retention. As
a result, the old share holders tend to retain a high fraction of shares at the IPO. Therefore, the
relationship between the ownership retention at the IPO and the value of a firm is foreseen to be
positive. As mentioned in the underpricing section, There is an implication on the owners of the
good firms is going to retain a high fraction of the ownership at the IPO based on the signaling
model. It argues that underpricing is used by the management in order to signal the firm's true
value Therefore it is expected to gain a higher price at the subsequent seasoned equity offer.
Hence, old shareholders ought to get a high fraction of shares so as to offset the cost of
underpricing at the SEOs. According to Leland and Pyle's (1977) model, Krinsky and Rottenberg
(1989) thinks that the net proceeds which was indicated in the offering prospectus, can convey
the insiders' private information regarding the future planned -projects in the firms. As a result, it
is recognized as a signal to the firm value. Krisnky and Rottenberg (1989) discovered positive
relationships between the proceeds and the IPO (subscription and market) prices. Based on the
UK USM data, also Short and Keasey (1997) finds a support for the positive net proceeds firm-
value relationship.
There are other variables are used as signals to indicate the value of IPO. For instance, the
auditor quality (Beatty, 1989; Datar et al., 1991; Feltham et al., 1991), and the quality of
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investment banker (Titman and Trueman, 1986), and the relationship between the issuers and the
banks (Slovin and Young, 1990). The firm's accounting information, such as the earnings
forecast are used to value the issue (Kim and Ritter, 1999; Firth and Liau-Tan, 1998; Keasey and
McGuinness, 1991). Heinkel (1982), Ritter (1984), and Clarkson et A. (1991) use financial
information to control sample heterogeneity Kim et al.. (1995) focus on the value relevance and
so as the predictive ability of the information of Korean IPOs. Two regression models are thus
developed. The first one is based on the pricing –formulae which is prepared by the Korean
authority This pricing formulae was heavily dependent on future earnings, net asset value after
the offerings and industry characteristics. The second one is called the augmented model. This is
an expansion of the first model. It is created through incorporating three signal variables-
ownership retention, underwriters' quality, and investment level. Empirical results indicate that
there is a positive and important relationship between earnings and industry characteristic, and
the market price. Moreover, there are indications on variables which tend to have a significant
role in the explanation and prediction of the aftermarket price. However, there are no evidence
to show if there are any notifiable relationship between the potential signals and market price.
How and Yeo (2001) argue that earnings and dividends disclosure minimize the IPO information
asymmetry as they investigated how earnings and dividend forecast would affect the pricing of
Australian IPOs. After that, they assume that earnings and dividend forecasts disclosure is
related to IPO initial valuation. Be that as it may, there are no empirical evidence so support such
hypothesis. They implied Brown et al. 's (2000) study on Australian non- IPO cases and
discovered that earnings forecasts are subjected to error as noisy estimation of future cash flows
are seen. They then questioned the relevance of the forecast information throughout the valuation
process.
Firth (1998) took a look at the role of profit forecast in the prospectus as a signal' of IPO value.
His previous study (Firth et al.., 1995) shows that historical earnings are poor prediction
indicators of future earnings since there is a typically fast growth of IPO firms. There are no
incorporation of the effects of the expanded activities of the firm financed by the new issue
proceeds. By using the predicted earnings disclosed in the prospectus, Firth’s study discovered a
strong positive relationship between earning forecasts and IPO market valuation. This result
matches with Clarkson et A.’s (1992), data collected in Canada. Klein (1996) investigates the
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relation between the information provided to the prospectus and the pricing of IPOs. It’s
investigation is to examine whether investors could use the prospectus to give price to an IPO.
According to Modigliani-Miller (1966), the equity value is a linear function for accounting
earnings, book value of equity, expected earning growth, and market or firm specific risk factors.
Furthermore, the hypothesis suggests the IPO price is an increasing function of earning per share,
book value, expected growth while acts as a decreasing function of risk at the same time.
Through getting the pre-IPO accounting information, some accounting information is disclosed
in the prospectus. These are greatly relevant tothe offer and one-week prices. This may differ
from Kim and Ritter (1999). Klein finds that there is an important relationship between the offer
and one- week prices, and the percentage of equity retained the underwriter reputation, and if the
offer includes a warrant. Moreover, there are prospectus information that explains there is more
variation of the offer price the one-week price. This means that when after traded one week in
the market, information revealing is also taken into consideration in assessing the newly listed
firms. The literature and studies provided above show-case the importance of earnings forecast
information on the IPO pricings. DuCharme et al. (2001) argue that as there is a small amount of
information about the firm available for pre-IPO, incentive is proposed for issuers to manipulate
the reported earnings. Therefore, they think pre-IPO earnings managed by issuers are positively
linked to the initial firm value. When earning management is an unobservable variable, a number
of management of accruals are used as proxies. The study used 171 public US IPOs from 1982-
1997to look for evidence that can support the hypothesis of the positive relationship between the
earnings management and the IPO offer price. The result indicates that the issuers, report better
earnings forecasts, as well as having a high initial price in the market.
Regarding to the relationship of earning management and performance of IPOs, DuCharme et al.
(2001) tested one more assumption in the second part of their study. They believe that there is a
negative relationship between the pre-IPO earnings management and IPO returns in the after-
market. After the study, they found no evidence to show the relationship, thus the hypothesis
does not stand.
There is an investigation done by Beatty et al. (2002)on the IPO pricing based on accounting
information. It is focused on the explanatory power of revenue, accounting earnings, and book
value as cash flow surrogates, to the offer price, the filing price, and the initial market price.
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Several models are tested changes in models are found which produces differences in the
explanatory power . As they sum up, the model is more important with IPOs that with the
established firms.
Moreover, they developed three more general models in their study. The first is the offer price
against the accounting information. 5 proxies are used for the offer price (unscaled per share,
unscaled total value, total value scaled by book value, total value scaled by revenue, and natural
log of total value). Pre-IPO earnings per share and pre-IPO book value per share are used as the
predictors. There are results showing that there is a positive relationship among the earnings and
book valuewith all offer price proxies. Also the explanatory power of the model can vary among
the different offer price proxies. The study shows that the earnings and book value are able to
explain as much as 17.6 % to the variation of per share data and the highest at 65.9% on the
natural log model. In conclusion, the historical accounting information is able to provide
information that can explain the variability of the offer price.
The use of the natural log of total value can expand the model by a number of predictors (eg.
revenue, IPO year dummy, shares percentage retained at the IPO, and the residual from the
previous natural long model). The earnings and book value data are transformed to the natural
log form. All predictors are significant and of expected signs, and the explanatory power rises to
75.05%.
Through adding pre-IPO market return and the natural log of the filing price as new predictors,
the model above can then be expanded. This creates an impact to the explanatory power of the
model which is raised up to 98.18%. The earnings, book value, and retained ownership
coefficients then became negative and their significance is diminished. The result suggests that
underwriters tend to overweigh the importance the fundamental variables when setting the filing
price because the filing value captures what the offer price would be as assumed by the
underwriters.
The market value model will be explained in this part. The model is related to the initial market
price and the accounting information and control variables. Evidence shows that there is a
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negative relationship between the three fundamentals and the market price. The result indicates
that there is a smaller degree of underpricing with firms with high fundamentals when compared
to those with weaker fundamentals. The study develop a proxy for the ex-ante risk measure in
order to see if the lower market price can lead to risk adjustment. The standard deviation of the
after market returns for 1 year is discovered as an unbiased proxy to the ex-ante risk measure.
They took cross sectional analysis to test the impact of the accounting information, risk, size and
industry on the initial returns. Also, the model also consists of the offer value residuals to
investigate the partial adjustments. As a result, the study found out that there is a relationship
between accounting information and the initial returns. There is also a positive relationship
between the risk and the initial returns. This confirms the partial adjustment created by the
underwriters during the marketing period.
To sum up, there are several equity valuation models applied in the literature. Since there is very
little information about the firm available to the market in prior to the admission, choices are
limited when they apply it to the IPOs. It is regarded as the most comprehensive information
about the issuing firms. In other words, it is available prior to the IPOs. Klein (1996) investigates
if the prospectus information on the IPO pricing is useful by using the US data. This study
examines the impact of the prospectus information on the IPO offer price and market price. They
defined the prospectus information as the firm accounting fundamentals, the ex-ante risk factors,
and the signals. The basic model used is able to analyses the impact of the accounting
fundamentals of the firm on IPO prices. Which is known as the accounting-based valuation
model. The research model is expanded by including the risk factors and the signals through
following the studies which are previously done (e.g. Beatty and ritter, 1986; Krinsky and
Rottenberg,1989).
According to Bruton and et.al., (2010) underwriter reputation and IPO performance are
closely related to each other. This is because in IPO majority of investment is made by
institutional investors. These sort of investors always focus on underwriters because entire
valuation of equity is done by underwriters. Many times if their performance is not so good then
they issue shares at very low price in order to ensure that relevant amount of money will be
raised from IPO. Hence, in such kind of situation investors think that it will not be right to make
investment in the firm and IPO failed to give good performance in stock market.
Contrary to this Dong, Michel and Pandes, (2011) state that underwriter reputation and
IPO performnace are not very closely related to each other. Means that underwriter image only to
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some extent can affect IPO performance. This is because invesrors while making invesment in
any business firm give main priority to firm business performance and its portfolio. Whatever is
share price it does not matter for them. On this basis it can be said that underwriter image or its
reputation may not largely affect IPO performance. In researches it is already observed that
while making investment in any IPO investors always try to find out whether firm business have
required potential. If there is enough potential in business firm investors make heavy investment
in the company and that investment remain long term. Thus, it can be said that there is big
contact between underwriter reputationn and IPO performance.
According to Chan, (2010) hot and cold winter seasons and IPO performance are inter
linked to each other as it can be seen that during hot season good amount of return is genderated
by IPO then cold season. It is hard task to identify reason behind such trend by it is observed that
common tendency is there among people that during hot season IPO perform well and during
cold season they failed to give expected level of performance. This is the reason due to which
most of investors are making investment in those IPO that launched during hot season.
Contrary to this Lee, Kuo and Yen, (2011) state that hot and cold winter seasons does not
have any sort of impact on IPO performance. This is because IPO performance depends on
several factors. Existence of hot and cold winter does not have any impact. If across the world
observation will be done then it can be identified that investors consider lots of factor and on that
basis they make investment. They does not believe in fact that if season is hot then IPO will
perform well and if same is cold then IPO will not perform good. It depends that what is unique
selling proposition of the business firm. More market have positive sentiments and company
have strong USP IPO will perform better. Usually, it can be observed that when any firm bring
IPO in the market commentry going on news channels about IPO and potential that company
have to give return to the investors. IPO perform well if analysts believed that firm stocks have
huge business potential. This is because these analysts do positive word of mouth marketing of
the business firm and create positive sentiments about it among people. This promote investors
to make investment in the business firm and IPO become successful. Hence, thinking that during
hot season IPO perform well is not completely correct. In specific nation coincidently there may
be a trend where IPO become successful in hot seaosn then cold season but it does not mean that
investors always consider these seasonal factors while making investment in any IPO. Thus,
firms must focus on marketing of their strong factors for making IPO successful then seasonal
factors.
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CHAPTER 3: RESEARCH METHODOLOGY
Research introduction
Present research study is carried out on IPO valuation and identifying factors that affect
IPO performance. There are number of factord that have impact on IPO performance after issue
and its valuation. It is often important for investors to identify whether IPO in which they intend
to make purchase is overvalued or undervalaued in nature. If IPO is overvalued then investor
may decide not to make investment in firm shares. In the current research study focus is made on
IPO valuation method PE ratio and hot as well as cold season impact on share price. It is
identified that during hot season price of IPO valuation remain high and in case of cold weather
IPO remain undervalued. It can be said that there are wide variety of factors that have impact on
IPO valuation. These factors need to be taken in to consideration while making investment
related decision. It can be said that scope of present research study is wide and readers will
obtain a lot of information about research topic from current research work. In the present
research study in data analysis section specific IPO valuation model will be used which include
price earning ratio and price to book ratio. There is great improtance of both sort of ratios for
investors and other decision makers. Price earning ratio is the one of the most important ratio
because it reflect whether shares are undervalued or overvalued in nature. Formula of price
earning ratio will be used for valuation and under this simply price earning ratio of company will
be computed that launched its IPO in the market and same will be compared with the other peer
firms and on that basis it will be identified whether firm shares are undervalued or overvalued. It
must be noted that price earning ratio is widely used for valuation of firms IPO. This is because
by comparing with industry peers it is eaily find out whether firm shares are available at cheaper
price or one is paying high amount of price for firm shares. Price earning ratio in current time
period is used almost by all sort of investors whether they are retail investors or large size
corporates. All these facts revealed that there is huge importance of price earniing ratio for
investors. In case of price earning ratio simply market price is divided by earning per share and
on the basis of comparison of computed value it is identified whether shares are accurately
valued or are underpriced in nature. Price to book ratio is another approach that will be taken in
to account for valuation purpose in present research study. Use of both tools will help in making
proper valuation of IPO.
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Research type
There are two sort of researches that are conducted by researchers namely primary and
secondary research. Primary research refers to the process under which fresh or new data is
collected from the market which can never be observed in any other website. On other hand,
secondary research refers to the data that is gathered from sources like books, journals and
magezines. These are those informations that are already gathered and published by someone.
Both primary and secondary research is done at large scale by the business firms (Dunne, 2011).
This is because sometimes according to research requirements it is better to gather secondary
data to arrive at specific point. On other hand, primary resarch is conducted by the business firms
when they want to identify trends that are currently in the market. There is significence of both
primary and secondary research and it depend on research topic and thinking of individual that
which approach they select to conduct research. In present research study both primary and
secondary research will be done. Secondary research will be done to prepare literature review
section of the report and to devlop good understanding about research topic. On other hand,
primary research will also be done so that reliable data can be gathered and current trends can be
identifid in respect to research subject.
Research approach
Research approach refers to the specific way in which entire research work will be
carried out. It is very important to follow appropriate approach in research study because it
ensured that research will be done in right direction. It is very important to ensure that research
approach is selected according to research topic. Usually, there are two sort of research
approaches namely inductive and deductive approach. Both research approaches are totally
different from each other (Cecez-Kecmanovic, 2011). In case of inductive approach new theory
is developed on the basis of research. Under this first of all aims and objectives of research study
are determined and on that basis past literatures are analyzed. It is identified that what were the
view points of authors on research topic. On the basis of literature review broad understanding of
research topic is developed. In fourth stage data is gathered from several sources and same is
analyzed and on that basis research theory is developed. In case of deductive approach inverse is
obsrved and it is identified that in case of deductive approach already theory is developed and by
formulating hypothesis same is teted. On this basis it is identified whether theory is true or not.
In current research study inductive approach will be taken in to account because on basis of
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analysis of data theory will be developed in research study as in current research study attempt is
not made to prove hypothesis. This indicate that apprpriate approach is taken in to account for
current research study
Research design
There are three sort of research design methods namely exploratory, descriptive and
experimental research design. Both these research designs are different from each other as in
case of exploratory research design one does not know anything about research topic and wants
to develop understanding about it from starting point. On opposite to this there is other research
design namely descriptive research design and it is used when one have knowledge of research
topic but same intends to extend its knowledge about same (Pickerd and et.al., 2011). Thus, it
can be said that exploratory and descriptive research design are different from each other. On
other hand, there is another research design experimental research design and it is used when one
wants to conduct scientific research. In present research study exploratory research design will
be taken in to account because in current research study in sufficient quantity secondary data is
gathered to develop good understanding of research topic. Thereafter primary data will be
analzyed. Thus, exploratory research design is used in current research study and by using same
research is carried out in right direction. Questionairre or interview of experts will be taken under
which different questions will be asked from them so as to collect relevant primary data in proper
manner. Under questionnaire some of questions will be included that will be related to literture
review different themes like IPO valuation methods, hot and cold weather and IPO performance
as well as other important concepts. It can be said that appropriate approach is selected in present
research study to explore research study in proper manner.
Research philosophy
Research philosophy is one of the most important section of present research study.
Research philosophy can be classified in to different categories namely interpretivism and
positivism philosophy. There is difference between both research designs and both are applied in
different research studies. Positivism research philosophy is used in research studies that are
scientific in nature. Contrary to this, interpretivism philosophy is used in those research study
which are non scientific in nature (Clarke and Fujimura, 2014). Current research study is not
scientific in nature and due to this reason interpritivism philosopy is used in present research
study. Both research philosophy have due importance for researchers and they according to their
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needs make use of these in research study. It depends on research requirements that which of
research design an individual select in respect to its research study. It is necessary to select
appropriate sort of ressearch design in study because if same will not be done then in that case
appropriate appraoch to collecct data can not be determined. Due to this reason selection of
appropriate research design, approach and philosophy is important in the research study.
Positivism philosophy is usually used in those research study where one prepare hypothesis in
order to identify whether specific theory really exist (Morgan, 2013). In order to check that
theory statistical tools are applied on data set in proper manner varied assumptions are tested
while applying models on data set. In this way, hypothesis testing is done and it is identified
whether theory really implement in the world.
Data collection
Data collection is considered as one of the important part of the research methodology
section of any report. Multiple sources are available as secondary sources and from same
secondary data can be gathered by the researchers. Apart from this, there are many ways by
following which primary data can be collected. Usually, primary data is collected by conducting
interview and by distributing questionnaires among respondents. In the present research study
primary data will be gatheredby conducting interview among respondents. This is because
research study topic is techical in nature and common man does not have very strong knowledge
of research topic. Hence, primary data will be gathered from knowldgeable people by conducting
interview. Questionnaires will be distributed among proffesional people that have strong
knowledge of market ( Mackenzie and et.al., 2012). By doing so it will be ensured that data is
collected from relevant sources. While conducting research it is very important to select
appropriate approach of data collection. This is because for every research one need to collect
specific sort of data. In interview few questions will be asked from interviewees which will be
very specific in nature and will help in achieving aims and objectives of research. There are
number of alternative sources that are available to the business firms in respect to data collection.
It depends on researcher that from which source it prefers to gathered data for research study.
While selecting any source for data collection one must identify advantages and disadvantages of
each source of information and accordingly must select specific one to conduct research.
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Data analysis
After data collection analysis of same is done in research studies. In order to analyze data
there are two major techniques that are available to researchers like thematic analysis and
application of statistical tools like SPSS. In current research simple interview of proffesionals
will be taken and after gathering details from them analysis of same will be done. In this way it
will be identified whether investmennt model prepared really is effective for IPO valuation.
Secondary data of IPO related firms will be taken and valuation of same will be done by using
price earning ratio and price to book ratio. Under this approach simple price earning ratio of firm
that launch IPO in market will be compared with peer firm IPO and in this way it will be
identified whether firm IPO was overvalued or undrvalued. Apart from price earning ratio price
to book ratio will also be taken in to consideration. Price to book ratio is also one of the most
important ratio as if value is less then one it is assumed that firm shares are overvalued or vice
versa. In this way entire data will be analyzed in present research study (Cecez-Kecmanovic,
2011). In many research study simply thematic analysis are done and under this charting of data
collected from different sort of people are done. On anaysis of charts it is identified that in which
direction respondents give response to asked questions. In case of SPSS analysis things are
totally different as it can be observed that in this inferential statististical techniques are used for
analysis of data and to identify relationship among variables. SPSS will not be used in the
present research study because simply in research questions set for interview will be
communicated to respondents and by analyzing their responses analysis will be done. Hence,
there is no need to apply thematic analysis on data in present research study. SPSS is usually
used in scientific research studies because in such kind of studies main aim is to explore
relationship between variables and to make prediction. Main aim of present research study is to
identify thinking that people have in respect to research topic. Hence, thematic analysis approach
also does not seems better approach to analyze data along with SPSS. It can be said that by
analyzing data by using thematic analysis method better results can not be obtained. In this
way, data will be analyzed in research study.
Ethics
In every proffesion there are some ethical standards that need to be followed. In research
also there is need to follow some ethics in order to ensure that research is carried out in
legitimate way and privacy remain maintained during entire research study. Usually, it is
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assumed that in every research study or any prooffession as much as possible ethics must be
followed (VanPatten. and Williams, 2014). This is because it ensured to front person that
relevant work will be done in proper manner and it is reliable in nature. In the present research
study secondary data will be taken from multiple sources like books, journals and websites. It
will be ensured that only from relevant books, journals and websites data is gathered. By doing
so ethical standards will be folowed and it will be enbsured to readers that they can rely on
obained results and can made decisions. As part of ethical practice it will be ensured that entire
data will be stored in excel which will be password protected as unknown person will not be able
to open excel sheet easily. Ethics are very important to follow in order to ensure respondents that
every thing will be secured and no one will be able to steal or view their data. It will also be
ascertain that sufficient number of respondents are taken in project. This will be done because
many times in research when small sample is taken accurate or reliable results are not obtained.
In order to ascertain that useful and accurate results are generated by research sufficient sample
size will be taken of sufficient size and it will made certain that all respondents have sufficient
knowledge of research study. This will ascertain that readers are reading reliable facts and
figures from the research report and can obtain good results if make decision by considering
conclusion and recommendation related to research topic.
Validity and reliability
Validity and reliability is the one of the most important feature of research studies. In this
section of research study it is ensured that research is carried out on right direction. Usually in
research one need to pay due attention to number of factors and many times some important
aspects of research are missed out and in such kind of situation there is high probability that
research may go in wrong direction. In order to avoid such kind situation validity and reliability
section is prepared in the report. In current research every attempt is made to ensure that there is
validity and reliability of present research study (Morgan, 2013). Validity ensure that sources
from which information taken for research study must be valid means that sources from which
data gathered must be authentic in nature. Reliability is another important featuer of research
study as it reflect that data that is collected for study must be fully reliable in nature. Means that
data must not only collected from valid source but it must also be ensured that collected data is
reliable and it will help researcher in generating accurate results from research. If accurate results
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are obtained then in that case better decisions can be taken by those who read report for specific
purpose.
Research limitation
There are few limitatons of the research work as big sample size is not taken in study.
Due to this reason it is possible that to some extent results of research may deviate from actual
facts. In order to fix this problem an attempt is made to ensure that only those candidaes are
taken in research study that have sound knowledge of research subject. Thus, it can be said that
there re few limitations of research study but steps are also taken on time to solve problem. In
every research study some of limitations are observed and in current research also same thing is
seen. It is observed that in past time period also many researches are conducted which product
very reliable results but such kind of research studies also have some limitations. In present
research every step is made to ensure that weakness of research study is eliminated completelty.
Thus, it can be said that every effort is made to make research study more reliable in nature. By
doing so to some extent research limitation is eliminated by researcher. Small sample size can
obviously considered as limitation of research but it also acts as one of core strength of same. It
is clear that sample size is small but it is also true that proffesional people will be consulted in
order to gathered data and to obtain relevant information in respect to research subject. Hence, it
can be said that research major limitation is also its major strength.
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CHAPTER 4: DATA ANALYSIS
Definition of small cap listed company in Hong Kong
As per rules companies whose market capitalization is below 1 billion comes in range of
small cap in Hong Kong stock exchange. In the Hong Kong stock exchange all those firms that
are in specific raneg comesn in category of either small cap, mid cap or large cap company.
PE ratios and fuiillment of four conditions
Small cap: In the investment model it is determined that all firms that must be included in model
must be in small cap category and must have market capitalization below 1000 million. Same
condition is followed and by following it World Link logistics company is selected whose
market capitalization is 859.20 million. Thus, firm comes in small capitalization category and
condition is fulfilled.
GEM board: In the investment model second condition was that company taken in to
consideration must be listed in GEM board. It can be observed that World Link Logistics was
listed in GEM board in December month in 2015 and due to this reason on this criteria company
is eligible to be selected in present research study.
PE ratio below market PE ratio: PE ratio reflects price earning ratio that is related to specific
company. This ratio is used for company valuation and under this company PE ratio is compared
to industry PE ratio and on basis of same it is identified whether firm shares are undervalued or
overvalued in nature. In present study main aim is to identify stock which is not overvalued and
then identifying whether same is better for investment purpose. In respect to all these things
return of stock will be compared with industry return in order to identify profitability or
performance of stock.
Table 1Calcualtion of PE and PB ratio
Total assets 95
Total liability 33
Number of shares outstanding 62
Book value 1
PB ratio 0.81
PE ratio 8.53
HK PE ratio 37.55
Market cap 859.2
It can be observed from the table given above that price earning ratio of World Link Logisics is
8.53 and same of industry was 37.55 which reflect that firm shares were underpriced in the IPO
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and it was best choice from investment purpose for the investors (World Link Logistics (Asia)
Holding LTD, 2017). Low PE ratio is clearly indicating that shares were priced at low value and
investors does not need to pay high price for making purchase of firm shares.
PB ratio: PB ratio is another parameter that is taken in to consider for valuation of firm shares.
It can be observed that usually those firms whose PB ratio is below 1 is assumed to be
underpriced. In present case it can be seen that price to book ratio value is 0.81 which is below1
and this is reflecting that firm shares are undervalued and it will be better choice to make
investment in firm IPO. Price to book value is the ratio where market price of shares is compared
with book value of shares and on that basis it is identified whether firm shares are undervalued or
overvalued in the industry.
Return computation: In this section on date of launch of IPO percentage return that is generated
by IPO is determined. It can be observed that return of 38% is generated by firm shares. As it can
Listing day price 0.5
Closing price 0.69
Return 38%
Be observed that on listing date share price was 0.5 and it closed at 0.69 on same day which
means return of 38% is generated by company shares for investors in single day on launch of
IPO. This reflect that good amount of return is generated by World Link Logistics IPO for their
investors on date of launch.
Percentage return comparison: Person return comparison of stock with index reflect whether
stok perform in line to index or it beat or remain underperformer in comparison to market.
Table 2Percentage return of Logistics firm shares and index
2015 December HK 2800 price 23.05
2016 December HK 2800 price 21.75
Return -6%
2015 December World Link Logistics
Holding 0.5
2016 December World Link Logistics
holding 1.89
Return 278%
It can be observed from the table given above that return of only -6% is generated HK 2800 and
return of 278% is generated by the index. On this basis it can be said that index failed to generate
sufficient amount of return but stock generate huge amount of returnfor the investors. It can be
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said that business firm perform better then index. From investment purpose logistics company is
one of the best option that is available to the investors and due to this reason investment can be
made on Logistics firm because its shares are generating good amount of return and are also
underpriced in nature.
Pilot study
Candidate 1
Will you consider to use this IPO investment model to invest?
Question is straightforward towards IPO but there are some changes that need to be made in it.
Question is talking about IPO investment model but it is not communicating an indiviudual that
what sort of investment model is it. Whether this model include PE ratio or PB ratio for equity
valuation or encompass discounted cash flow model intrinsic value for valuation. Hence, there is
need to clearly reflect type of items that are included in the IPO investment model. Question is
going on in right direction as respondents will be fund managers and by asking this question it
will be identified whether they consider IPO valuation model before making investment.
Wording is perfect in this case and there is need to modify it in proper manner.
If yes why? If no why?
This question is also going on in correct direction as in this question reasons due to which fund
managers avoid to make investment by considering mentioned model will be identified.
However, this quesiton can be increased little bit more. Under this respondent can be instructed
to rank factors and communicate specific one due to which they are making use or not making
use of investment model in the investment decisions. Wordings are properly made in asked
question.
Any comment to this financial model? Such as any factors should be included into the
modeling?
This question is perfect becaue for making single invesment decision use of only few parameters
is not sufficient. One must focus on multiple factors to make investment decisions. In the current
investment model only two parameters are taken in to account namely PE and PB ratio. Some
fund managers may assume that inclusion of both tools in model is sufficient and someone may
be disagree and due to this reason asked question is considered perfect.
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Any difficulty to apply this model in real world? One of difficult is that hot IPO may over
subscribe a lot, so there may be no allocation
This question need to be modified as first section is perfect but need little editing. However,
second queston is not correct because first part is related to model and in it hot or cold IPO factor
is not taken in to account. Hence, second part of this question must be removed. Wordings are
right in question.
Candidate 2
Will you consider to use this IPO investment model to invest?
Question is framed in proper manner and it goes directly to the research topic which is good.
There is clear and concise sentence and due to this reason it can be assumed that respondents will
be able to give answer of asked question in right manner. In this question also wording is perfect
and no alteration need to be made in it.
If yes why? If no why?
This question is also prepared correctly and placed well in structure as first question is related to
consideration of IPO investment model. Then second question asked is if you consider then what
is the reason behind it. Hence, sequence of both quesitons will give clear answer of opinion that
respondent actually have about investment model.
Any comment to this financial model? Such as any factors should be included into the
modeling?
This question is also correct because first attempt is made to identify effectiveness of financial
model and then question is asked about modificiation that may likely to be made in model.
Overall by asking this question model improvement inputs are received. Wordings are perfect
and no need to make change in it.
Any difficulty to apply this model in real world? One of difficult is that hot IPO may over
subscribe a lot, so there may be no allocation
There is need to remove second question because it does not seem much relevant to first
question. Wordings must be kept same in first question.
Transcription
Interview was conducted for 5 fund managers. Moreover, 2 people were used to conduct
the pilot study which helped in assessing that whether the company is able to collect appropriate
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amount of the data from stated questions or not. Further, changes will be made to the questions
that can asked to the actual fund managers.
Based on the pilot studied carried out, following transcription have been received:
Theme 1: IPO investment model comprises PE and PB ratio is effective. Do you agree?
Fund manager 1: As fund manager I think it is perfect because both ratios help in equity
valuation and help investors in identifying whether they are paying right amount for shares in
IPO. Hence, in my opinion model is effective and investor can make prudent decision on basis of
this model.
Fund manager 2: There is need to make slight modification in this investment model as DCF
model must also be included in it. In DCF model number of items are covered and due to this
reason in better way accurate value of shares can be computed in the model.
Fund manager 3: Model is perfect because in this comparison is made between parameter
variable PE ratio and company ratio. There is simple principle that any firm can not perform
better then industry. Hence, PE ratio help in measuring fair value of shares in proper manner
Proffesional investor 1: As proffesional investor I like to consider number of factors like firm
business model, its USP and factors that may boost its growth rate instead of using any
invesment model. This is because investors usually evaluate firm business and if they think that
it is growth orientted then make investment in it irrespective of its PE and PB ratio value.
Proffesional investor 2: In my opinion PE ratio or investment model you talking about must be
used but decision must not be taken on the basis of same. Investment model is not completely
effective.
Proffesional investor 3: Investment model is effective as it include multiple metric that can be
used to make prudent decisions.
Theme 2: If yes why? If no why?. Also communicate one of top priority factor that you think
is mainly responsible for effective or not effectiveness of model?
Fund manager 1: Model is perfect because by making comparison accurate valuation of IPO is
done. Inclusion of earnings in model and its ratio to price made it effective.
Fund manager 2: Model is partially effective and this is assumed because many factors affect
business and same are not included in model. Non estimation of future cash flows is one top
factor due to which model is considered partially effective.
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Fund manager 3: Model is effective because on basis of comparison with peers valuation os
equity is done. Comparison with peer firms is top factor that make model effective.
Proffesional investor 1: Model is not effective because limited factors are taken in to
consideration in model. Consideration of less factors specially future cash flows at discounted
value make this model ineffective
Proffesional investor 2: Model is not assumed effective and there is need to make amendments
in it. There are other techniques of equity valuation that is available to investors also. Non
inclusion of Gordon growth and other model is one of top factor due to which model asumed
ineffective.
Proffesional investor 3: Model is effective because inclusion of PE and PB ratio is sufficient and
both are top factors for assuming it effective.
Theme 3: Any comment to this financial model? Such as any factors should be included into
the modeling?
Fund manager 1: The model that have been selected for the purpose of IPO analysis is
appropriate enough to understand how the IPO of the company is doping. The model has taken
into consideration P/E ratio which is the ultimate reflector of assessing the share price of the
company. It also reflects how the company is performing and how the IPO or stock of the
company is going to perform in the near future. However, the main issue I have found in the
model is that it do not consider the fluctuation in the price of the share and just takes into
consideration the opening and closing price. However, the average price would have given better
results than the return used in the model. There are various factors that are considered by me
before making any investment in IPO. The financial statement of the company must reflects high
performance through high revenue and increasing profits over the year. The brand image of the
company also help in assessing the condition to a great extent. Further, I also make analysis of
the future prospects of the company and if I find that the company is fruitful for me, then only I
make investment in it. Analysis is the most important part if the investment is made right, the
return generated from it will also be good for the investor. Appropriate consideration must be
made to assess that whether the IPO will be reflecting better position of the stock. The position
reflected must be correct and not biased.
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Fund manager 2: I analysed the overall model and found that the selected model for IPO
valuation is not appropriate enough to make the assessment of it. In depth analysis could have
been performed by the analyst. Further, the parameters used to analyse the IPOs are much
specific and hence can not be applied to the high market cap and low market cap companies.
Since, the IPO have been registered in 2015 and 2016 only. It is difficult to asses the
performance through various parameters as well. The constraints applied to this model are
extreme enough making it difficult for assessing every type stock on it.
Fund manager 3: Model is good and I think that there is no need to make change in same
because it is simple and anyone even it is retail investor can use model to make investment
decisions.
Proffesional investor 1: Model is not perfect as commented above and there is need to include
some of factors like estimation of cash flows for at least five years and net cash flows must be
discounted at WACC. Therafter, capital structure and other things must be considered to
compute fair value of shares.
Proffesional investor 2: IPO investment model is good but it is not excellent and in this regard I
would like to give some recommendations like various other valuation multiples and models
must be taken in to account so that proper decisions can be made.
Proffesional investor 3: Model is developed in proper manner and no further modifications are
required.
Theme 4: Do you find any difficulty to apply this model in real world?
Fund manager 1: No difficultty is observed to apply this model in real world becase data is
readily available for model.
Fund manager 2: Model is simple and easy to use and due to this reaosn there is no difficulty in
its application.
Fund manager 3: Therre is heavy simplicity in model and it can be applied by any investor.
Proffesional investor 1: No concept of model is easy to understand and it can easily applied in
real world.
Proffesional investor 2: Model can be easily applied by anyone.
Proffesional investor 3: There is no problem in application of model.
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CHAPTER 5: CONCLUSION
It is one of the most important section because it reflect the entire conclusion that is formed on
the basis of research study. It can be observed that price earning ratio is concisdered as one of the
best approach to do equity valuation or identifying whether firm shares are undervalued or
overvalued in nature. In case it is identified that company PE ratio is below industry then it is
assumed that shares are underpriced. This is because any company can not easily beat industry in
terms of performance. In case industry PE ratio is high then industry then it can be assuemd that
shares in overpriced if earnings are taken in to account. Most of fund managers make wide use of
PE ratio in their business. In the current report also to identify profitability and performance of
the business firm PE ratio and many other calculations are performed. It is concluded that firm
taken above IPO share price was undervalue in nature and it was best opportunity for investors
from investment point of view. This is because it generate return of approaximately in rage of
30- 40% in single day and on yearly basis it beat market which reflect that firm fundamentals are
very strong in nature and also it perform better in the industry which means that this factor play
decisive role in consistent increase in firm share price. It is also concludeed that people give
mixed response to overall effective performance of the invetment model that is developed above.
Respondents taken can be classified in to three categories namely fund manager and proffesional
invstors. It is observed that fund managers have common belief that this model is effective but
proffesional investors are not believing too much on investment model. This is because fund
managers use technical tools and techniques in order to make their investment decisions. On
other hand, proffesional investors make cautious decisions but they moderately or less use any
tool or technique. Such kind of investors see trends in which shares are moving along with index
and stock fundementals. They are less concerned about values of PE ratio. Hence, such kind of
investors have common belief that apart from PE ratio other tools and techniques must be used
which are more accurate in the IPO investment model. In respect to this discounted cash flow
model can be included in the IPO decision investment model. Discounted cash flow model is
considered as one of the most important model because under this future cash flows are
estimated and same are discounted to identify present value of future cash flows. Same is taken
in to consideration to compute intrinsic value of shares.
It is also concluded that there is significent importance of underwriter reputation and
annual closing price. In past researches and literature rerview conducted it is identified that
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underwriter reputation have significent impact on IPO performance. More better underwriter is
selected by the business firm IPO will perform well or vice verse. This happened because
underwriters like Goldman Sach have different images among fund managers and other people.
These organization successfully win trust of people and due to this reason fund managers and
other proffesional investors beleieved that shares are fairly valued by investment banker and due
to this reason investment must be made in the firm shares. There is interlink between IPO
performance, image of invesmtment bank and underpricing of shares. It is concluded that initial
return to some extent are neagtively limked to the underwriter reptuation. If underwriter
reputation will be good then shares will be less underpriced in IPO and initial return on stock
will be less. Hence, it can be said that all these things are interlinked to each other. High position
of underwriter lead to high price as it is common tendency that is observed among such kind of
underwriters. In case it is observed that share price or issue price is high investors abstain from
making heavy investment because in case shares price decline heavy loose will be observed on
investment and due to this reason most of investors avoid making investment in IPO where
already share price is very high. Hot and cold market is the another factor that is highly
considered by investors for making investment decisions not only investors but those firms that
intend to launch IPO also take in to consideration hot and cold winter as a important factor to
make decisions. It is observed that during hot winter time period IPO launching become
successful but when there is cold winter season IPO does not gain reuqired success. This is the
reason due to which most of business firms avoid to launch IPO during cold season. In past
reseaches like one that was conducted on South Africa it was observed that number of IPO
launched in cold market were 113 and same was 247 in hot market (Underpricing-of-IPOs-
during-Hot-and-Cold-Market-Periods-on-the-South-African-Stock-Exchange-JSE, 2013). This
fact clearly reflect that thre are large number of firms that are prefering to launch IPO during hot
season. First day market adjustd return for IPO launched in cold market is 4.91 and same is 95.71
in case IPO launched in hot market. This big difference is clearly indicating that better return and
more number of IPO were launches in hot season then cold season. Same trend was observed in
first week market adjusted return where return of 6.77was earned on IPO that were launched in
cold market. When IPO launched in hot market return percentage on weekly basis is 92.07. Gap
between these returns become more wide in first month adjusted return where return percentage
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declined to 1.02% in case of cold season and same increase to 102.48% in case of hot season. It
can be said that hot market is best time to launch IPO then cold market.
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