Corporate Finance/the corporate form and initial public offerings

a) The IPO process is characterised by information asymmetries. Explain how these asymmetries may be reduced through the book-building process.

b) Researchers have noticed that IPOs tend to be under-priced in the short-term and to under-perform in the long-term. Explain how under-pricing and under-performance are measured in empirical studies and explain why these phenomena are observed

c) Why might a company choose to list overseas?

d) Companies that are listed on the London Stock Exchange must comply with, or give reasons for their non-compliance with the UK Code of Corporate Governance. Briefly explain the Code’s requirements with respect to independent directors. Do you believe that these requirements deter relatively small companies from seeking a listing? Explain your response.

Part Should be explained carefully
(a) Explanation of the term “information asymmetries”
Description of book-building process
Explanation of how the process reduces information asymmetries
(b)
Explanation of measurement of under-pricing
Explanation of measurement of under-performance
Reasons for observing these phenomena (references to relevant literature required to get full marks here)

(c) Explanation of reasons for overseas listing

(d) Explanation of requirements
Discussion of their possible deterrent effects
—
Referencing Requirements:
-Quiry, P., Dallocchio, M. Le Fur, Y. and Salvi, A. (2011) Corporate Finance Wiley, often referred to as Vernimmen (the author of a French textbook on which this is based) (second edition pg.593- 620)
-Allen, F. and Faulhaber, G.R. (1989) “Signalling by Underpricing in the IPO Market” Journal of Financial Economics 23, 303-323

-Loughran, T., Ritter, J.R. and Rydqvist, K. (1994) “Initial Public Offerings: International Insights” Pacific-Basin Finance Journal 165-199

-Reilly, F.R. (1977) “New issues revisited” Financial Management 6 (4) 28-42

-Rock, K. (1986) “Why New Issues are Underpriced” Journal of Financial Economics 15, 187-212

-Sherman, A.E. and Titman, S. (2002) “Building the IPO Order Book: Underpricing and participation Limits with Costly Information”
Journal of Financial Economics 65(1) 3-29