IPOS

Question 1

Chemmanur and Fulghieri 1999

Answer 1

life cycle theory - goes public after growth to reward universities venture capitalists, in the future firm will keep growing and consolidate it’s position with mkre public equity with a lower cost if capital

Question 2

Lucas and Mcdonald 1990

Answer 2

Market timing theories - go public when the market valuation if the company is high to maximise capital raised. Asymmetric info between manager and investor or they wouldn’t invest in a company overvalued

Question 3

Pagano et al 1998

Answer 3

alternative explanation to lucas and Mcdonald - the price is increased by successful projects which improve the companies profitability and asset Base therefore investment ratios e.g eps go up. In practice this raises the market value allowing the firm to go public at a higher offer price

Question 4

Lemons

Answer 4

asymmetric info - investors fear IPOS which try to time the market. So managers deter this stigma by lowering there offer price to satisfy investor returns and boosting investor profits

Question 5

Bookbuilder theory

Answer 5

investors understate demand to exploit a lower offer price - high first day returns. Underwriters combat this by keeping some money on the table to stop investors exploiting this. Hanley 1993 noticed underwriters didn’t fully adjust prices upwards allowing high first day returns