Regarding to the previous article about THE INITIAL PUBLIC OFFERING, i’d like to add some words that can increase your knowledge about the IPO system and hopefully you’ll find it useful for.
To deals with asymmetry information, investor commonly use some mechanisms that signal the company quality. One of them are choice of insurance, that have high incentive to build reputation as a master of valuation to take them go public. Insurer also expect to have institutional base client, as an investor institution is more willing to participate in IPO when there are no uncertainty on the IPO firm. When a company is not being able to raise funds through other aspect of financing, such as loans or private equity, IPO is providing access to substantial amounts of capital. However, it is commonly analyze that IPO company offer prices that are lower than their first-day market closing price, and this is a well-researched situation. There is widespread terms that underpricing is a strategic move designed to compensate investors, especially institutional investors, for taking the risk of investing in the IPO.
There are other advantage such as extra interest of stock for the first time publishment. To minimalize the risk of the IPO company were done by people approvement not to sell their personal stocks for certain terms. Because an inside investor have better information about company operation than outside investor, It is expected that publish company commited to a lockup period. A long lockup signals company quality, and insurer may use this period to establish the aftermarket trade of IPOs through price support. The longterm performance in the returns to stocks that make an IPO has been poor, as showed by research in the United States and other countries. One factor especially responsible for this outcome is excessive optimism regarding the company profit potential.
Some research has discover that IPO firm will develop in previous period to offer equity. The company also frequently issued when the investor is willing to pay relatively high for stok that have been publish. These factors explain why a company with increasing income instantly underperform for certain time.