Evaluating IPO Under-pricing: Australia, US, and Hong Kong Markets

This report analyzes the phenomenon of IPO underpricing, focusing on the Australian and US markets and comparing them with empirical data from Hong Kong. The analysis explores the roles of behavioral and asymmetric information theories in explaining underpricing, highlighting how information imbalances and investor sentiment can influence IPO valuations. The study references research examining IPO underpricing in the Hong Kong stock market to provide a comparative perspective, considering factors like underwriter influence and the impact of underpricing on capital raising. The report discusses the implications of underpricing for both investors and companies, particularly the differences between developed and developing markets. The report also highlights the significance of underpricing in generating returns for investors during the initial offering period. This work provides a detailed examination of short-run IPO underpricing across different markets.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

FINANCE
1
Table of Contents
Question:....................................................................................................................................2
3. Evaluating the occurrence of short run IPO under-pricing in Australia and US by
contrasting the results with empirical study conducted on Hong Kong:...................................2
Reference and Bibliography:......................................................................................................6

FINANCE
2
Question:
3. Evaluating the occurrence of short run IPO under-pricing in Australia and US by
contrasting the results with empirical study conducted on Hong Kong:
The theories comprising of behavioural and asymmetric composition can be
identified, as the measure fulfilling the viability of IPO under-pricing in US and Australian
market. Moreover, the asymmetric theory indicates that information distribution is not
adequately conducted among investors and companies, as it allows the investor to gain
abnormal gains. Moreover, the behavioural theory indicates the willingness of the investor to
investment in a stock during their IPOs. Hence, the combination of both asymmetric and
behavioural theory directly supports that presence of IPO under-pricing, as it allows the
investor to generate high rate of return from investment. The investors with the right
information forces the price of IPO down to maximise the returns that is generated from
investment. Hence, it could be understood that both asymmetric and behavioural theory
supports the presence of under-pricing of IPO shares in US and Australian stock market.
The empirical research mainly focuses on determining the overall under-pricing of
initial public offerings which is been conducted in Hong Kong stock market. The research
paper uses the overall duration of 10 years to identify the implications and impact of under-
pricing on initial public offerings, while detecting its presence in the Hong Kong stock
market. Identifying the presence of under-pricing measure used in Hong Kong stock market
could relevantly help in understanding its presence in Australian and US stock market
(Chong, Yuan and Yan 2010). The research estimates the average IPOs and pricing level in
Hong Kong stock market to detect presence of under-pricing in the stock market. In this
context, Boulton, Smart and Zutter (2017) stated that with the under-pricing of IPOs the

FINANCE
3
underwriter is able to attract more investors during the IPO initiation and effectively free float
shares of the organisation.
From the early valuation of the research it could be identified that 16.6% of the 92
IPOs were on an average underpriced, directly indicate its presence in the Hong Kong stock
market. Moreover, Beck (2017) stated that the IPO under-pricing is a relatively high in
developing countries in comparison to developed countries, as investors are keen on
increasing the profits from the initial public offering. The researcher also evaluated the short
run abnormal returns that are generated from the IPO under-pricing in Hong Kong stock
market. This would eventually help in satisfying the statement regarding the presence of
under-pricing of IPOs. The researcher collectively uses dependent variables such as the
closing price of IPOs first day trading, which is used in understanding the difference between
the initial price and the closing price of a particular stock (Chong, Yuan and Yan 2010).
Second dependent is also used in the research, which comprises of data from first 7 trading
days and first 15 trading days for detecting the overall presence of under-pricing in IPOs.
The explanatory variables are also used in the research for identifying the impact of
under-pricing in determining the overall share price of IPOs. With the use of geometric mean
the overall returns and annual growth of a particular stock can be identified, which might
allow investors to increase the level of returns from investment. The researcher has a
relatively used regression analysis to identify the significance of the values derived from the
calculation. The researcher also evaluates that the Four Big Firms conducts the IPO valuation
and selling in the stock market. The calculations mainly state that IPO selling conducted by
PricewaterhouseCoopers and KPMG is much accurate on Hong Kong, as compared to the
evaluations conducted by Ernst & Young and Deloitte & Touche (Chong, Yuan and Yan
2010). The empirical research also indicated that there is a presence of under-pricing of IPL
during the initial stage, where low price shares are provided to investors to complete the share

FINANCE
4
selling process. The low cost shares provided to investors relatively allows the company to
sell of their issues for generating the required level of capital (Francis 2017).
From the overall evaluation, it could be identified that IPO under-pricing level in
Hong Kong stock market is at the levels of 16.8%, which has a relatively small magnitude of
an uprising in comparison to other countries (Chong, Yuan and Yan 2010). Moreover, the
shares related to A-Category are less impacted with the under-pricing process, while the B-
Category stock is highly impacted by the under-pricing process. Therefore, from the
evaluation of the empirical research it could be understood that developed countries have less
impact of under-pricing during initial public offerings as compared to developing countries.
However, the presence of enterprising for short duration is the relatively present in the Hong
Kong stock market as evaluated from the empirical research.
Hence, from the valuation of Hong Kong stock market it could be identified that both
US and Australian stock market conduct IPO under-pricing for short duration. Consequently,
the occurrence of short-run IP on the pricing in the Australian market would eventually
hamper the company's ability to raise the level of capital to support its operational plans. This
under-pricing is essential for both the investors and companies to benefit from the initial
investment conducted during the IPO session (Morricone et al. 2017). The research directly
shows that in case of developed countries, the under-pricing impact is less, while developing
countries have high impact of short run under-pricing in its stock market, which benefits the
initial investors and allow them to generate higher returns from investment.

FINANCE
5

FINANCE
6
Reference and Bibliography:
Beck, J., 2017. Determinants of IPO Underpricing: Tech vs Non-Tech Industries. Major
Themes in Economics, 19(1), pp.39-55.
Boulton, T.J., Smart, S.B. and Zutter, C.J., 2017. Conservatism and international IPO
underpricing. Journal of International Business Studies, 48(6), pp.763-785.
Chong, T.T.L., Yuan, S. and Yan, I.K.M., 2010. An examination of the underpricing of H-
share IPOs in Hong Kong. Review of Pacific Basin Financial Markets and Policies, 13(04),
pp.559-582.
Francis, B., 2017. The Information Environment of the Firm and IPO Underpricing (Doctoral
dissertation, Rensselaer Polytechnic Institute).
Kotlar, J., Signori, A., De Massis, A. and Vismara, S., 2017. Financial wealth,
socioemotional wealth and IPO underpricing in family firms: A two-stage gamble
model. Academy of Management Journal, pp.amj-2016.
Morricone, S., Munari, F., Oriani, R. and De Rassenfosse, G., 2017. Commercialization
Strategy and IPO Underpricing. Research Policy, 46(6), pp.1133-1141.