Underpricing of Initial Public Offerings ( IPOs ) is a historic norm in both developed and developing. Hiring of investment bankers to put sensible monetary value for IPOs has been a usage of equity markets with mean under pricing in between the scope of 10-17 % . However. during last decennary. universe position most undue under pricing ratios with the degree lifting to over 50 % . From the 7 % under pricing in 1980s to 15 % ratio of under pricing during early 1990s. the ratio has raised to significant degrees during 2000s ( Loughran and Ritter. 2004 ) .
The addition in under pricing is chiefly attributed to possible additions or returns that investors and even owners/issuers achieve on following few yearss or after lockup termination. The cardinal index for finding return achieved by investors is the intraday return which measures individual twenty-four hours alteration in monetary value and therefore. additions for investors. While the general premise about motivations of under pricing are frequently highlighted in several research plants. it has been a controversial issue given the possible use by IPO houses and investment bankers.
Harmonizing to Securities and Exchange Commission and National Association of Securities Dealers. the investing Bankss moving as directors of security listings. have unnaturally manipulated monetary values of IPOs to derive from hyperbolic returns. Several improper committees obtained by investing Bankss have been detected by case houses which were collected in return for illegal trading activities and unreal demand of IPOs.
While thorough research undertakings for developed and developing states is easy available for investors’ mentions. peculiar attending is drawn towards Asiatic markets that have dining equity markets and attract investors around the universe. Several research workers have investigated IPO procedure. their under pricing and associated factors in Hong Kong. nevertheless. there is really limited up to day of the month informations available for possible investors. Very limited figure of reliable research workers has investigated the relationship between the rate of subscription and the underpricing of IPOs in Hong Kong from 2003 onwards.
During 2000s major structural and economic alterations have taken topographic point in the equity markets around the universe including the Asiatic markets. One of the two major structural alterations includes amalgamations between equity and derivative exchanges around the universe and between Hong Kong Stock Exchange and Hong Kong Futures Exchange. Besides Hong Kong since 1990s has seen several singular betterments in the market conditions due to capital influxs from China’s outstanding growing. The period after 2000s holds importance from a position of a roar in economic system that has brought alterations in analysis of factors impacting the IPO issues and their returns.
This undertaking intends to look into the tendency of IPO under pricing in Hong Kong’s market and its consequence on intraday returns of investors. The intraday return is measured on footing of rate of subscription and market monetary value of IPO on naming twenty-four hours. Where developed states like France. Germany and UK had under pricing ratios of 16. 5 % . 40. 2 % and 39. 6 % during early 2000s. developing Asiatic states had under pricing ratios in scope of 18 % to 50 % ( Chi. and Padgett. 2005 ) .
Apart from intraday return and subscription rate. there are several cost related factors associated with IPO under pricing that will be considered in analysis of Hong Kong market. The IPO allotment procedure in Asiatic markets varies from developed states as in Asiatic market non-discretionary allotment is done. In non-discretionary IPO allotment procedure. financess are taken from investors up front and are held until procedure of allotment terminals. Such procedure involves certain sum of cost on investors’ behalf which must be subtracted from overall return for IPO.
Apart from this. underwriters’ compensation and listing costs are besides included in IPO procedure. The intraday returns are analyzed on footing of first twenty-four hours return every bit good as funding and listing costs. IPOs and their underpricing is a norm in equity markets since it is a scheme used by houses through investment bankers to pull new investors for a possible addition. The pricing of an IPO is determined on footing of several factors which include the book value of the portions being offered. its debt to equity ratios. asset-backing ratios and several other public presentation and composing based factors.
The investors of IPOs are usually lament on gaining an intraday return for their investing in IPO. Intraday return is normally used as a step of initial public offering ( IPO ) underpricing ( Chi & A ; Padgett. 2005 ) . The more underpricing of an IPO will supply more return for the investors but more chance loss for the old stockholders or house ( Ross. Westerfield & A ; Jordan. 2008 ) . An equal of import construct is that of subscription rate which refers to the figure of applications that are received for subscription of the IPO that is being launched.
Loughran and Ritter ( 2004 ) reported that dumping in the US ranged from 7 % in the 1980s to 15 % in the 1990s before worsening to 12 % in the post-bubble period. The underpricing patterns differ in different provinces based on their underwriting patterns in each state every bit good as the information available to and demanded by the investors sing factors that formulate the pricing for IPOs. A survey by Chen. Firth and Kim ( 2004 ) provided an penetration into the Chinese stock market and their techniques of IPO underpricing.
Similarly. Kucukkocaoglu ( 2008 ) presented a paper on comparing between international patterns of IPO underpricing and the one being followed in Turkey. Hong Kong stock exchange ( HKEx ) is comparatively a volatile market given the developing phase of its economic system and fiscal industry and hence. has attracted several research workers towards analyzing the public presentation of its IPO market and sing the underpricing techniques used. Information about the ratio of the adjusted cyberspace touchable assets per portion to the offering monetary value ( the assets-backing ratio ) and the rate of subscription is publically available to investors.
However. the importance of these factors in finding the underpricing of IPOs and its results is ill-defined for many economic systems where the research is either uncomplete or prior the major economic alterations in that province. For case. the surveies on IPO dumping in Hong Kong and the major factors associated with it are dated back to late 1990s and hence. supply less discerning and valid information for investors who are looking for investing chances today.
Lack of information sing Hong Kong’s market during 2000s is a hinderance to knowledge of international investors who are in hunt of factors related to IPOs that affects their initial returns and hence. returns for investors’ money. For case. the terrible under pricing of IPOs witnessed during 2000s with its first twenty-four hours return making to degree of 65 % is unaccountable to common investors and even to some analysts.
The motivation of this paper is foremost to understand the grounds for under pricing of IPOs in Hong Kong and survey of assorted factors that straight or in straight affect IPO underpricing every bit good as intraday returns. These factors include rate of subscription of an IPO which once more is related to plus value of house that is ready to be listed on stock exchange every bit good as information dissymmetry that is present in markets. Apart from this. factors like subscription rate and asset-backing ratio are so tested against underpricing degrees and intraday return to find the extent of direct or indirect relationship between these factors.
The chief aim of this survey is to find the relationship between assorted factors that lead to under pricing tactics by organisations and the relationship between rate of subscription and asset-backing ratio to IPO dumping based on their initial returns. The relationships will besides be determined interchangeably for case. relationship between rate of subscription and intraday return will besides be determined. The survey contains several subdivisions lending to the analysis of the paper.
The statement of research will supply a elaborate description of what the paper investigates in this research and what are the chief inquiries to be answered. The intent of carry oning a research of this kind is besides explained along with its significance to assorted groups of readers including investors and analysts. The sample for this survey consists of databases related to around 284 IPOs that have been listed on HKEx during the period of 2003 to 2008. Since there are no recent surveies conducted on similar country in Hong Kong market. the informations used in this survey provides fresh information and analysis.
The undertaking is divided into several subdivisions that provide overview of Hong Kong’s IPO market every bit good as choice of IPOs to be analyzed. Second. the major accounts offered for the underpricing of IPOs by major research workers and bookmans are provided. This besides gives a manner to farther analysis of factors and hypotheses that are needed to be developed in this research. The following subdivision will continue to treatment of measuring of variables and finding of relationships between assorted elements related to IPOs and methods that will lend towards constitution of that relationship.
Finally. the measuring methods will be applied to prove hypotheses presented above and consequences will be presented along with treatments. Further account of chapters is given below. The literature reappraisal provides a sum-up of past and current tendencies in empirical research on IPO underpricing. The subdivision will reexamine parts of several research workers in the field of analyzing Initial Public offerings and its underpricing in assorted states and specifically Hong Kong. Then the methodological analysis will include different subdivisions supplying information refering to the research methods that have been employed in this paper.
Several theoretical accounts and hypotheses have been developed to explicate this phenomenon. Finally the information aggregation and analysis will sum up the whole research into touchable and valid decisions based on consequences gathered from utilizing the research methods chosen before. Statement of the Research Problem Several research workers after 1980s have shown huge involvement in the initial public offerings. its monetary value computation. initial returns and the impact of assorted factors like subscription rate. asset-backing ratios and company public presentation on underpricing of these IPOs.
Loughran. Ritter. and Rydqvist ( 1994 ) completed a comprehensive study of companies traveling public in 25 states from 1980 to 1089. They found that the mean initial return in Hong Kong was 17. 6 % . Chong. Yuan. and Yan ( 2006 ) mentioned that the mean IPO underpricing degree for H shares—shares of companies incorporated in mainland China that are traded on the Hong Kong Stock Exchange ( HKEx ) —from 1993 to 2003 was about 16. 8 % . This figure is similar to the degree of dumping found in developed states. Prior surveies have presented assorted theoretical accounts to explicate the underpricing of IPOs.
Kiymaz ( 1998 ) presented a paper on reappraisal of public presentation of Turkish IPOs through appraisal of subventioning techniques and methods used by investment bankers in Turkey. The survey analyzed IPOs launched during 1990 and 1996 on Istanbul Stock Exchange ( ISE ) . Similarly assorted research workers ( Chen. Firth & A ; Kim. 2004 ; Kucukkocaoglu. 2008 ) have conducted empirical research on set uping relationship between rating methods and under pricing of IPOs in different states including Turkey. China and Bangladesh. utilizing listed IPOs for a specific clip period.
Kucukkocaoglu ( 2008 ) in his survey analyzed the IPO underpricing methods in Asia and recommended methods to command the volatility in these markets. Umutlu ( 2008 ) besides focused on factors like picking order and timing that can impact public presentation of IPOs. Prior surveies have presented assorted theoretical accounts to explicate the underpricing of IPOs. Burgstaher and Divhev ( 1997 ) . during their research on IPOs inferred that plus value of houses present a curve map which means that they are comparative to values of firm’s net incomes every bit good as its book value.
Among these factors book value factor is the most of import factor impacting value of house. Based on the book value of house. investment bankers deduce firm’s IPO initial monetary value offer. Therefore. it can be concluded that underpricing of IPOs is someway related to net plus value of houses. Similarly. rate of subscription is another of import factor that is based on demand for IPO of a house. The more demand is created for a specific firm’s IPO ; the greater will be its subscription rate. Surveies by Vong. conducted in 2006 every bit good as in 2009. consider IPOs in Hong Kong that went public during late 1980s and early 1990s.
However. no research has been conducted on the relationship between the assets-backing ratio and the underpricing of IPOs in Hong Kong from 2003 to 2008. No research based on this clip frame tests the relationship between the assets-backing ratio and the underpricing of IPOs in Hong Kong. This survey attempts to make full that spread. This survey besides seeks to turn to the thought that the subscription rates of offerings provide valuable information about how the intraday returns affect the first twenty-four hours of trading for a company’s stock portions on the HKEx.
Given the importance of these factors. it can be said that this survey has two chief aims. First. this survey intends to enter widen the IPO information for Hong Kong’s stock market and present the degree of dumping that took topographic point during more recent period i. e. during 2000s. Given this nonsubjective the period of 2003-2008 is chosen to integrate latest alterations that have taken topographic point on world’s economic platform. This period enables a comparatively big sample of issues to be examined by sing a significant figure of Hong Kong IPOs following economic rising prices and so bubble explosion in 2003 and economic impairment in 2008.
After scrutiny of degree of dumping in Hong Kong. the undertaking will measure the chief country of research which includes apprehension of factors that positively and negatively affect intraday returns of IPOs. These include the degree of subscriptions and asset-backing ratio which incorporates a firm’s plus value. This country of survey draws mostly upon the bing theoretical accounts for degrees of underpricing ( Baron. 1982 ; and Rock. 1986 ) and the related theoretical and empirical literature derived from these theoretical accounts.
From this literature. a figure of hypotheses are formulated and tested. Despite assorted surveies conducted on IPOs in Hong Kong and the factors impacting them. there is a demand for information upgrading for the investors and analysts. During 2000s major structural and economic alterations have taken topographic point in the equity markets around the universe including the Asiatic and European markets. Hong Kong has been given enormous attending by investors around the universe for its uninterrupted advancement and investing merchandises.
The public presentation of IPOs and their underwritings methods. hence. hold besides seen alterations that have affected their public presentation. This survey attempts to make full the spread between the old surveies that have attempted to analyse Hong Kong market’s public presentation during early 2000s and the current public presentation of Hong Kong markets. before and after the market ruin worldwide. This survey extends the organic structure of research presented by Vong ( 2006 ) . who used 251 samples to reason that there was a relationship between the rate of subscription and IPO underpricing in Hong Kong from 1988 to 1995.