Initia Public Offering

Valuing an early-stage company or initial public offering(IPO) is difficult because much of the company's currentvalue depends on expected future revenues from products not yet marketed. Valuing an IPO in a nascent industry is even more difficult since there is no historical information for comparison.When the first companies in a new industry go public, underwriters have little guidance beyond traditional valuation methods employed in other industries, though they may have a vague sense of uneasiness about unfamiliar territory. Market participants are not limited to the information used by the underwriters. Moreover, incentives may induce underwriters to set offer prices below their best estimates of the value. For either reason or both, IPOs generally experience sizeable first-day returns.

IPO can be made by two methods: Best effort where both parties negotiate price. If there is not enough demand IPO should withdrawn. The second method is firm commitment where underwriter will guarantee if no demand in the market. The risk carried by the underwriter but it a bit crucial to set price appropriately. The process of IPO started with preparation of document by the underwriter and then all information filed in preliminary prospectus. SEC will review it within maximum of 20 days while the underwriter searched for market. Lastly, the official prospectus is ready to be out.

Underwriter has to set the price to satisfy both clienteles, the issuer and the investor. If price set too low, the issuer does not realize full potential to raise capital. Consequently the underwriter has incentive to keep the price high. The reputation of underwriter will be the characteristic to be chosen.

The monthly average initial returns are calculated by taking an equally-weighted average of the initial returns on all the offerings in a given calendar month. Because daily stock prices of over the counter stocks are more readily available in recent years, two different methods to measure the initial returns.

The effect to investor is uncertainty on under pricing event. Initial public offerings arc significantly underpriced, on average. The more established an issuer and hence the less investor uncertainty about the firm's real value, the lower the amount of under pricing. Hot and cold performances come in waves, the persistence of which is predictable. Cold issue markets have average initial returns that are not necessarily positive. The number of new offerings also comes in waves of heavy and light activity which are highly serially correlated.

A conflict that exists in an organization between those who are in positions of control or trust (agents) and those whose interests are to be served (principals or stakeholders) in which actions taken by the agents instead serve their own interests. Such conflicts tend to arise more frequently in organizations that lack sufficient or effective material, moral and coercive incentives for agents to act otherwise. Also called principal-agent problem

Agency theory is a concept that explains why behavior or decisions vary when exhibited by members of a group. Specifically, it describes the relationship between one