Underpricing of Initial Public Offering in the UK: A comparison between the Main market and the AIM market

GENERAL EVIDENCE TO IPO UNDER-PRICING

During the 1980s , the market expected an average of 11 returns on the initial public offerings (IPOs ) within the first week of opening , which subsequently almost reached up to 21 during the period of 1991-1999 During the magical period of 1999 - 2000 , the returns were almost 66 These effects can be largely credited to the amendments in the composition of a number of listed companies appearing as public . What is the most prominent reason behind the harsh under pricing of initial public offerings where the returns have

been unexpectedly higher

According to the statistics , the IPO under pricing had almost doubled from 7 to 16 from the 1980 's to the late 1990 's . In general , the increase in the under pricing can be pointed towards the previously concealed group troubles between underand issuing firms . Stating in other words , the problems between the two , that were initially not present on the main scene became of overriding importance during the 1999 - 2000 . These two propositions are often referred to as the varying composition theory and the agency theory

The first theory of varying composition is supported by the postulation that dicey and unsafe IPO 's will be obviously underpriced by more than less dicey IPO 's . If the percentage of IPOs that correspond to unsafe stocks swells up , then the average under pricing ought to increase (Ritter (1983 . As a note , the number of IPO 's from the Information technology sector has risen up with time . Another significant point to note was that , there exists no proof about the companies which were appearing as public during the late eighties was actually older than those who went into the public sector during the nineties . The average age of an issuing company was around 7 years during the 1980s and 8 years during the 1990s , before it came down to 5 years during 1999-2000 ( the internet bubble or the magical period . An analogous outline holds for sales structure , that there was no secular inclination in the average sales of public companies

In contrast to the late 1980 's , the IPOs which were administered by high pro investment banks / underin the 1990 's , were more highly underpriced than IPO 's which were linked to inferior status under or investment institutions . This phenomenon was explained as- since the underwriting in the IPO business became more profitable due to the augmented enthusiasm of firms to put down more money on the table (Money on the table is defined as - the first-day price change (offer price to close ) times the number of shares issued . As a result the under / investment institutions made more profit from the money that was left on the table with the help of a rent-seeking action of buy-side investors . Moreover the market investors are prepared to give higher rates to the underin to receive IPO allocations . At the same time , the issuing companies are also ready to accept higher under pricing from high...