Market Index And IPO Underpricing Case Study
Several studies have reported a negative link between firm size and short run underpricing (Megginson & Weiss, 1991, Ibbotson, Sindelar & Ritter, 1994; Carter, Dark & Singh, 1998). Younger and smaller companies are more underpriced because they are riskier (Ritter, 1984; Ritter, 1991; Megginson & Weiss, 1991). Michelsen and Klein (2011) argue that company size acts as a primary role when the firm was making decision on whether to go private or not. According to the authors, the probabilities for the small and mid-sized companies to experience undervaluation of their assets is higher and tend to delist when compared to large corporations. The increasing of the information asymmetry tend to attract firm to delist. This is due to the reason that small and mid-sized companies produce information less visible and less interesting to market agents.
The liquidity of its shares is heavily influenced by the company size as smaller company generated and disclosed lesser information to the public, created lower attention and thus lesser analysts to follow up. When this …show more content…
Derrien and Womack (2003) also outlined that the market overall’s price momentum 3 months before the offering act as an important ex-ante predictor of the underpricing level in French IPOs market. On the other words, this means that they are able to predict the underpricing level by using market index. On top of that, the same situation happens in on Istanbul Stock Exchange market (Yüksel & Yükse, 2006), United State (Loughran & Ritter, 2002; Lowry & Schwert, 2004), United Kingdom (Davis & Yeomans, 1976), and Hong Kong (McGuiness, 1992). Good to know that Lowry and Schwert (2004) also outlined the effect of market index on underpricing issues was