IPO Pricing

This research examines the pricing of initial public offerings (IPOs). As addressed in this research, IPOs refers to equity stocks issues when a corporation first initiates public trading of its shares. Initial public offers of corporate debt are not included in this definition.

The thesis explored in this research is that IPOs frequently are incorrectly priced intentionally either higher or lower that the sustainable market value of the equity shares. Included in this exploration are considerations of the models used to evaluate IPO pricing, the evidence of incorrect IPO pricing, any evidence that specific investment banks or underwriters are linked consistently with incorrect IPO pricing, the effects of institutional investing on IPOs, and the criteria for success of an IPO. Background information on the use of IPOs and recent levels of IPO activity is provided in the following discussion.

Background Information on IPOs and Recent Levels of IPO Activity

Investors are interested in IPOs because they "offer the prospect of swift gains: a doubling of the share price on the first day of trading is not uncommon" ("American IPOs" 83). Over time, however, IPOs generally tend to under perform in relation to the market as a whole.

Through mid-November, 469 IPOs had been floated in stock markets in the United States ("American IPOs" 83). These IPOs generated $24.2 billion for the issuing corporations.

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arket portfolio with borrowing or lending" at the risk-free rate of interest (Sharpe 149). All investment strategies other than those combining market portfolio and the risk-free rate of interest in an optimal manner would be expected to fall below the capital market line (Sharpe 149). The slope of the capital market line "can be regarded as the reward per unit of risk borne, (and) equals the difference between the expected return of the market portfolio and that of the risk-free security divided by the difference in their risks" (Sharpe 149). The capital market line develops the capital asset pricing model with respect to portfolios. The security market line develops the model with respect to specific individual securities (Brigham, 199). "Under the assumptions of the a capital-asset pricing model, all securities and portfolios plot on a security market line going through a point representing the riskless rate of interest" (Sharpe 164). The beta value for the risk-free security is 0.0, and "every security with a beta value of zero should provide an expected return equal to the riskless rate of interest" (Sharpe 164). The beta value for the market portfolio is 1.0, and "every security with a beta value of 1.0 should be pric
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Some common words found in the essay are:
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Approximate Word count = 3709
Approximate Pages = 15 (250 words per page)

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