Introduction:
The following is an excerpt from the Deloitte 2015 IPO market update (Deloitte 2015, p. 4):
Despite the recent turbulence in global markets, there have been a total of 48 listings (36 in 2014) up to the date of this report, raising $4.4bn and representing a total market capitalisation of $8.4bn.
Technology and financial services listings continue to drive investor appetite and represent 50% of all 2015 listings.
The IPO market continues to significantly outperform the ASX 200, demonstrated further by strong growth of stocks including Eclipx (34.8%) and the recent listing of Pepper Group (29.2%), amongst others.
Of the 48 listings in 2015, 21 had a market capitalisation in excess of $75m, generating an average share price performance gain of 7.2%.
In comparison, the ASX 200 has continued to be subject to market volatility on the back of international uncertainty, dropping 4.1% over the period to 21 August 2015.
Questions:
Inspired by 2015 IPOs performance, Jason Ryder, the CEO of Dynamic Mining, a gold private exploration and mining company, is planning to raise equity through an initial public offering. Jason is going to propose the plan to the company’s major shareholders, but worries about resistance from some of the shareholders, who are known to be conservative. He remembered from his university finance course that many IPOs in the US were issued at prices substantially below the first-day closing market prices. However, he was not sure whether the short-run IPO under-pricing phenomenon exists in the Australian stock market. Jason asks you, the Chief Financial Analyst (CFA), to investigate and prepare a report on the following issues:
1. Calculate initial return, analyse and interpret the Australian IPO market (13 marks)
Short-run IPO under-pricing is a well-known phenomenon in the US stock market. But is this phenomenon unique to US IPO firms only? In other words, does this phenomenon perhaps also exist in the Australian stock market?
To answer this question, you need to investigate the short-run IPO performance in the Australia stock market.
To measure the short-run IPO performance, you will have to calculate and analyse the initial return of IPOs that were listed on the Australian Securities Exchange (ASX) from 1 September 2013 to 31 December 2013.
The initial return (Ritter 1991, p. 7) equals:
• [(The first trading day closing price – issue price) / issue price] * 100.
Download the list of IPO firms with their issue price and the first trading day closing price from Morningstar DatAnalysis Premium.
Remove those IPOs without issue price in the spreadsheet downloaded from DatAnalysis.
Also, make sure you select the adjusted price for the closing price.
Describe the sample selection process.
You should list any assumptions made during the sample selection process.
Critically analyse the results of your calculation using the entire sample and describe the insights that could be gained from the calculation.
For instance, you should describe the results of the analysis using simple descriptive statistics, such as mean, median, minimum, maximum, etc., or the frequency distribution.
Next, categorise your data/calculations into groups using two variables (e.g., industry sector) and describe what additional insights you could gain from the analysis.
You will decide which grouping variables you will use and provide justification(s) for your selection.
You should also list any assumptions made in the analysis.
Wherever appropriate, the summary of your analysis and/or results (e.g., in a brief table, chart or graph) should be presented in the main text of your report.
However, the data, detailed calculation/analysis and results should be presented in the Excel spreadsheet, which must be embedded in the Appendix section of your report.
Note that 1 mark is allocated for organising and presenting the calculation/analysis and results in the embedded Excel Spreadsheet and report.
2. Describe a reason for short-run IPO under-pricing (5 marks)
Select and discuss one theory/proposition that in your opinion provides the most plausible explanation for the occurrence of short-run IPO under-pricing in the US and/or Australian stock market.
Perform some background research and use the findings to justify your selection.
You are expected to use at least two academic references for this task. You may use articles from academic journals or textbooks, but not Wikipedia, Investopedia or other non-academic Internet websites. Use Harvard Referencing.
3. Describe and discuss a study investigating the short-run IPO under-pricing in an emerging market (10 marks)
Pick one stock market from the selected emerging markets of; Argentina, Bangladesh, Brazil, Chile, Egypt, India, Indonesia, Malaysia, Pakistan, Philippines, South Africa, South Korea, Taiwan, Thailand, Turkey or Vietnam.
Perform some background research and then describe one study that empirically investigates the existence of short-term IPO under-pricing in the stock market you have chosen.
To answer this question, you are expected to describe the study (including the research methodology used to examine the existence of short-term IPO under-pricing and the factors explaining the degree of under-pricing in the selected stock market) and the empirical results on the degree and factors explaining the short-term IPO under-pricing, and discuss the reason(s) proposed by the study to explain the existence of IPO under-pricing in relation to the theory discussed in Question (2).
In attempting this task, you are expected to use at least three academic references.
4. Correct Harvard Style Referencing (2 marks)
REFERENCES TO USE, BUT NOT LIMITED TO:
1. The list of IPO firms, initial offering price, historical closing prices, and all other relevant financial information should be obtained from Morningstar DatAnalysis Premium.
2. ASX 2014, IPO the road to growth and opportunity, retrieved 25 January 2016, https://www.asx.com.au/documents/products/ASX_IPO_Brochure.pdf.
3. Deloitte 2015, Deloitte 2015 IPO report, retrieved 25 January 2016,
4. Ritter, JR 1991, ‘The long-run performance of initial public offerings’, The Journal of Finance, vol. 46, no. 1, pp. 3–27.
5. Chapters 2 and 3 from: Black, K 2011, Business statistics: for contemporary decision making, 8th edn, John Wiley, Hoboken. Available as a Deakin University Library e-book.
6. Chapters 5 & 12 from: Introduction to Corporate Finance. Graham, Smart, Adam & Gunasingham, 2014.
