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Underpricing of US FinTech IPOs

Written by Islam Kobeisy

Paper category

Master Thesis

Subject

Business Administration>Finance

Year

2018

Abstract

Master Thesis: Underpricing of US financial technology companies is the percentage difference between the issue price of stocks sold to public investors and the first day's closing price, which refers to the price increase on the first trading day of the initial public offering Barry and Jennings (1993). It can also be measured by the "money left on the table." An example of one of the largest cash-raising IPOs in the history of fintech companies is the IPO of Workday, Inc (Wikipedia). On October 12, 2012, the company was listed on the New York Stock Exchange with an issue price of US$28 and a closing price of US$48.69. The sale of 22.75 million Class A shares raised US$637 million, which means the underwriter of the IPO , Morgan Stanley and Goldman Sachs sold these stocks at prices below their intrinsic value. In other words, this means that Workday, Inc has about $20 per share left. Alexander (1993) answered the question of "how much income investors can get if they invest in IPOs" in his research. The research results are quite noteworthy. He believes that the underpricing level of US IPOs from 1980 to 1987 was 16.09%. If investors invest $1,000 in each of these IPOs and sell stocks one day later, they will receive $698.840, which is actually a reason for investors to seek more information about the quality of the IPO and thus obtain higher investment Return. In addition, Ritter and Welch (2002) found that between 1980 and 2001, the average US IPO was underestimated by 18.8%. According to data from Loughranand Ritter (2002), during the period 1990-1998, US IPOs left more than $27 billion in funds. In the 1980s, the average first-day return of initial public offerings (IPOs) was 7%. (Loughran&Ritter, 2004) The average first-day return doubled to nearly 15% (Loughran&Ritter, 2004). Ritter (1984) surveyed 1,075 American companies, of which 569 technology companies, from 1977 to 1982, averaged 16.3% of initial earnings. Based on the previous discussion and empirical results, we can propose the following hypotheses: 4.2 Age One of the most basic characteristics of a company is the company’s age. The age of the company is considered a proxy for prior uncertainty, which is calculated as the difference between the founding data and the first trading day. Old companies prove that they can work effectively in the market for a long time because of their history and reputation. Because investing in old companies is considered less risky than investing in younger companies. When we deal with a company that has been in the market for a long time, there is less uncertainty. 4.3 Market value The size of a company is considered to be a proxy for the prior uncertainty in the value of a company's stock. As a measure of company size, I used market value, which is the value of issued shares multiplied by stock price. Using market value as a measure of company value is due to the lack of information about the company’s previous total assets in an IPO. The ex ante uncertainty proxy market value is measured by the natural logarithm to reduce the correct skewness of the data distribution (How, Izan and Monroe, 1995). Large companies have less uncertainty when they go public. They are always monitored by investors, governments, shareholders, stakeholders and the media (Zhang, 2006). In addition, there is no interest in collecting information about small companies, because this information will not bring big benefits after the IPO. Securities with less available information hold greater risks, and this information shortage will prompt the market and investors to demand higher abnormal returns for holding such securities (Barry & Brown, 1984). However, many researchers have investigated the relationship between market value and underpricing. Mercado (2011) investigated 282 US IPOs between 1998 and 2000. He found that there was a significant positive correlation between company market value and IPO underpricing. Islam, Ali, and Ahmad (2010) studied 173 IPOs of the Bangladesh Stock Exchange from 1995 to 2005. They recorded a positive correlation between market value and underpricing, which means that the size of a company has a positive effect on the degree of underpricing. Have a positive impact. In addition, Sohailand Nasr (2007) pursued the importance of the signal hypothesis proposed by Allen and Faulhaber (1989) and Welch (1989). They found that there is a significant positive correlation between the underpricing level of newly issued stocks and the company's market value. Consistent with the results of previous studies, we can assume that there is a positive correlation between the underpricing level and the market value. Therefore, we can assume the following hypothesis-the market value of financial technology companies is positively correlated with the underpricing. 4.4 Proceeds Beatty and Ritter (1986) found that uncertainty has a greater impact on the expected level of underpricing. In their research, they believe that the total proceeds raised from initial public offerings are a good representative of prior uncertainty. They studied 1,028 U.S. companies that went public from 1977 to 1998. In their research, they used the reciprocal of IPO proceeds as a proxy for prior uncertainty. Read Less