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Title: IPO ( Initial public offering ) of small companies
Description: Initial public offering of small companies - analysis
Description: Initial public offering of small companies - analysis
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Initial public offering of small companies
Primary, I
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O underpricing is when company’s shares are offered to the public for first time at a price
below the price which investors are willing to pay when the shares start trading in the second market
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P
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pricing is a product of information differences
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P
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underpricing occurs because of differences in information
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(Cohen & Dean, 2005) Moreover, I
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O
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Consequently, investors do not feel secure and think they are taking greater
risk when investing in small entities than large ones
...
P
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is associated with weakness of the issuer
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(Espinasse,
2011) For example, according to the theory, if a company has weak earnings growth it should
compensate its investors by underpriced I
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O
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(Karlis, 2000)
Furthermore, according to the “lemon theory” by George Akerlof (1970), uninformed investors bid
without knowing the quality of the I
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O
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However, underwriters need uninformed investors to bid due to the scarce number of informed
investors
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P
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(Akerlof, 1970)
Lastly, small companies’ I
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O is underpriced owing the possibility of company failure
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Generally, I
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O
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Usually, there are three methods for a company to go public: (1) auction method, (2) fixedprice method and (3) book-building method
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P
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is less underpriced
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P
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can be slightly reduced by choosing to offer the shares directly to the public without the help of an
underwriter
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(Espinasse, 2011)
Best option for small businesses to minimize
I
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O
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It is a process by which an underwriter builds a
book of potential investors and prices and number of shares they are willing to pay for
...
P
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underpricing is to provide enough freely available information about
the issuer
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However, the EMH suggests that the information provided should be of reasonable quantity and timely
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com, 2015)
Alternative possible way to reduce I
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O
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P
Title: IPO ( Initial public offering ) of small companies
Description: Initial public offering of small companies - analysis
Description: Initial public offering of small companies - analysis