The highly anticipated IPO has now turned into a debacle, sparking fury among investors which led to the filing of a number of lawsuits. Questions Andrew Preston, the CEO of Greentech Company, a private game software developing company, is planning to raise equity through an initial public offering. Andrew is going to propose the plan to the major shareholders and is worried about the resistance from the shareholders due to the recent Facebook’s IPO debacle. He remembered from his MBA finance course that many IPOs in the US were issued at prices substantially below the first day closing market prices.
However, he was not sure whether the short-run IPO underpricing phenomenon exists in Australia stock market.
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Andrew asked you, the chief financial analyst, to investigate and prepare a report on the following issues. 1. Short-run IPO underpricing is a well-known phenomenon exists in the US stock market. Is this phenomenon unique to the US IPO firms only? In other words, does this phenomenon exist in the Australian stock market? To answer this question, you are required to investigate the short-run IPO performance in the Australia stock market.
To measure the short-run IPO performance, you should calculate and analyse the initial return of IPOs that were listed on Australian Securities Exchange (ASX) from June, 1 2009 to May 31, 2010 and remain listed up until its 2 year anniversary. The initial return (Ritter, 1991, p. 7) equals [(the last trading price at the end of the first day of trading -initial offering price)/ initial offering price] * 100. Download the list of IPO firms with their issue price and the first trading day closing price from Morningstar DatAnalysis.
The initial offering price is called the issue price in DatAnalysis. Please make sure that you select the adjusted price for the closing price. Critically analyse the results of your calculation using the entire sample and describe the insights that could be gained from the calculation. For instance, you could describe the results of the analysis using simple descriptive statistics such as mean, median & etc. or frequency distribution. Next, categorise your data/calculations into groups using 3 variables such as industry and describe what additional insights you could gain from the analysis.
You must decide on your own the grouping variables to be used and provide the justification(s) for your selection. Also, list any assumptions made in the analysis. (5 marks) 2. How do the IPO firms perform after the IPO? Examine the performance of IPO firms analysed in Question (1) 2 years after they were listed on ASX using the 2-year holding period return. Compare and contrast the 2-year performance with the initial return based on the grouping 3 variables chosen in Question (1). The formula for 2 year holding period return (Ritter, 1991, p. 4) is ? P ? Pt ? 2 ? year holding period return = ? 2 ? ? 100 ? Pt ? P2 = the adjusted closing price on the 2-year anniversary. If the first trading day is June 1, 2009, then the 2-year anniversary is June 1, 2011; if the 2-year anniversary is a non-trading day, then use the adjusted closing price of the trading day immediately prior to the 2-year anniversary; If the company is suspended from trading on the 2-year anniversary, use the available adjusted closing price, Pt = the adjusted closing market price on the first day of trading, (3 marks) 3.