Incentives to under price – Accounting and Finance Journals
This journal written by Grame Camp, Aimee Comer and Janice C.Y. How, is an in-depth analysis of share pricing and directly relates to IPO’s (Initial Public Offerings) and how often under pricing your shares initially doesn’t detract from overall net worth and in fact can lead to greater increases in wealth due to future economic benefits gained from shareholder support and confidence as a result of the initial sale of shares at a loss. This theory is primarily supported by Rock (1986), Habib and Ljungqvist (2001) and Barry (1989) who have all got works published on this matter.
Under pricing of IPO’s is a very common practice, studies show that under pricing ranges from 4.2 per cent in France to upwards of 80.3 per cent in Malaysia. Under pricing is frequently described as ‘money left on the table ,’ with the implication that the issuer incurs a wealth loss from trading the IPO shares at a reduction. Ljungqvist suggests that the choice issuers make at the IPO are strategic as they generate a wealth benefit in the aftermarket which ratifies the wealth loss suffered from the offering. The theory as supported by Ljungqvist is that ‘higher direct issue costs associated with an issuer’s choice to book build are traded off by a lower level of under pricing. This in turn impacts on wealth through the level of ownership retention. Focusing on increased trading volume in the immediate aftermarket as a wealth benefit from the IPO, the results support the notion that the choices issuers make at the offering generate a compensatory benefit in the aftermarket. Specifically, issuers’ choices that result in higher under pricing and wealth loss also result in higher tra ...