Under pricing and long term performance of IPOs in the USA

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ACKNOWLEDGEMENT

I would like to take this chance for thanking my research facilitator, friends and family for the support they provided me and their belief in me, as well as the guidance that they provided me, without which I would have never been able to do this research.

DECLARATION

I, (Your name), would like to declare that all contents included in this proposal stand for my individual work without any aid, and this proposal has not been submitted for any examination at academic as well as professional level, previously. It is also representing my very own views and not essentially those that are associated with university.

Signed __________________ Date _________________

CONTENTS

ACKNOWLEDGEMENT2

DECLARATION3

Rationale of the Study5

Background6

Thesis Statement7

Aims and objectives7

Research Questions7

CHAPTER 2: LITERATURE REVIEW8

Reasons for underpricing8

Theory on the Long Term Performance of IPOs10

International Evidence12

CHAPTER 3: METHODOLOGY14

Empirical Methodology on IPO Underpricing14

Empirical Methodology on Long-run Performance15

Data Collection17

Consideration of Ethics18

Time Scale19

Proposed budget and resources20

References21

CHAPTER 1: INTRODUCTION

The initial public offering (IPO) is a crucial phase in the life of a firm. It has attracted a great attention in the field of corporate finance. Therefore, a lot of literature is presented to explain the various aspect of this subject. The fact that these IPOs are linked with some fascinating empirical patterns also contributes the augmented interest and attention given to the IPOs. Our study will also revolve around two keys ones that are under pricing and long term underperformance. These two issues in the IPO market are considered anomalies. The under pricing of Initial Public Offerings is widely studied anomalies in field of financial economics (Logue, 1973; McDonald and Fisher, 1991; Ritter, 1984; Ibbotson, 1975; Ibbotson, Ritter, 1991; Sindelar & Ritter, 1988; Ritter and Loughran, 2002; Ritter and Welch, 2002; innumerous others). One reason for the increased level of interest this issue has attained is the magnitude of the trend; the average first-day return is about 20% for the last four decades. In contrast, the long-run underperformance, as the name suggests, illustrates the observation that IPO companies, over the period that may cover up to five years, following the IPO, may underperform as compare to the stock market and as compare to public firms with analogous characteristics (Loughran and Ritter, 1995; Ritter, 1991). Even though, there is extensive literature available describing the two anomalies, it is worth mentioning that most of the times both anomalies are discussed independent of presence of the other one.

Rationale of the Study

Several studies have scrutinized the performance of IPOs and recorded the presence of short-run surplus returns along with long-run underperformance. Ibbotson (1975) is considered to have conducted the first study reporting the 'under pricing' of IPOs by recording original excess yeilds of 11.40% on common stock IPOs in USA. Research on the long-run aftermarket stabilization price performance, such as Aggarwal and Rivoli (1990) and Ritter (1991), disclosed that this early outperformance seems to be a short-run incident. The signaling-based models, winner's curse theory, and the theory that Initial public offerings performance ...