Finance Report: IPO Under-pricing in US, Australia, and Hong Kong

This finance report examines the phenomenon of IPO under-pricing, evaluating theoretical frameworks and empirical studies across the US, Australia, and Hong Kong markets. The report focuses on behavioral and asymmetric information theories, highlighting how investors leverage under-pricing to maximize returns. An empirical study of the Hong Kong market reveals the presence of under-pricing, with the analysis spanning a decade of IPOs. The research categorizes companies based on their susceptibility to under-pricing, noting that specific audit partners can influence the degree of under-pricing. The findings indicate that under-pricing in Hong Kong can significantly affect company valuations, potentially allowing investors to secure high returns. The report concludes that under-pricing is a factor in the US and Australian markets and provides insights into the impact of under-pricing on investment strategies. The report includes references to relevant literature.

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Table of Contents
Question:....................................................................................................................................2
3. Evaluating different level of theories for identifying the presence of under-pricing in
Australia and US, while assessing an empirical study to identify the presence of under-pricing
in Hong Kong market:................................................................................................................2
Reference and Bibliography:......................................................................................................4

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Question:
3. Evaluating different level of theories for identifying the presence of under-pricing in
Australia and US, while assessing an empirical study to identify the presence of under-
pricing in Hong Kong market:
The behavioural and asymmetric theory can be identified, as the overall measure,
which could help in detecting the presence of under-pricing mechanism in the Australiana
and US market. The investors in Australiana and US market mainly relies on the information
that is provided by the companies and make adequate decisions for deriving the valuation of
IPOs in the initial stage. The behavioural theory and asymmetric theory directly states that
investors are keen on increasing their profit from investment by under-pricing the IPO and
generating high level of returns from investment. Furthermore, theoretical valuation also
indicates that with the under-pricing measure investors can maximise their profits in the first
day of trading (Leitterstorf and Rau 2014).
Moreover, adequate empirical theory is evaluated, where the IPO conducted in the
Hong Kong market is evaluated to identify the presence of under-pricing measure in the stock
market. In addition, the researcher adequately utilises the overall data from 10 years of IPO
initial conducted in Hong Kong market to detect the presence of under-pricing conditions in
the stock market. The researcher also evaluates the stock market of different counties to
determine the presence of under-pricing mechanism in developed and under developed
countries. The researcher uses the data from first day of trading, seven days of trading and
fifteen days of trading to determine the overall presence of under-pricing mechanism in the
Hong Kong market. Moreover, the data is based on geometric mean, which helps in

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understanding the presence of under-pricing mechanism in the Huong Kong market (Chong,
Yuan and Yan 2010).
Moreover, the empirical research indicates the presence IPO under-pricing in Hong
Kong Market, which is directly reduces the valuation of companies using the first day of
trade. The research also states that companies falling in A-category have low impact from
under-pricing, while the B-category stocks have high level of impact from the under-pricing
mechanism. In addition, the output of empirical research indicates that 16.8% of the IPOs are
under-priced in Hong Kong market, which could directly allow the investors to generate high
rate of returns from investment. The results also indicate that companies having Ernst &
Young and Deloitte & Touche as their audit partner have higher impact from under-pricing in
their IPOs (Chong, Yuan and Yan 2010).
Hence, from the evaluation it could be detected that there is a presence of IPO under-
pricing in the Hong Kong market, which could directly affect share of the companies. In
addition, the evaluation of theories and the empirical research directly indicates that Australia
and US are influenced by IPO under-pricing, as it helps in improving the level of returns
from investments. The investors utilise the presence of under-pricing mechanism for
obtaining shares at low price and generate high rate of returns from investments. The
presence of IPO under-pricing can generate high rate of return from investment for investors,
while completing the issue of IPO initiating companies.

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Reference and Bibliography:
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.
Judge, W.Q., Witt, M.A., Zattoni, A., Talaulicar, T., Chen, J.J., Lewellyn, K., Hu, H.W.,
Shukla, D., Bell, R.G., Gabrielsson, J. and Lopez, F., 2015. Corporate governance and IPO
underpricing in a cross‐national sample: A multilevel knowledge‐based view. Strategic
Management Journal, 36(8), pp.1174-1185.
Leitterstorf, M.P. and Rau, S.B., 2014. Socioemotional wealth and IPO underpricing of
family firms. Strategic Management Journal, 35(5), pp.751-760.