Investment Strategies for Initial Public Offering of Shares (IPO) - Investments

Investment Strategies for Initial Public Offering of Shares (IPO)

One of the known investment strategies is based on the shares of companies conducting the IPO . The most well-known phenomenon associated with IPO, is the undervaluation of shares ( underpricing ) at the time of placement (the price gap between the first day of the exchange trade and the valuation in the private placement process). The prices of the majority of shares at closing of the first day's trading on the exchange are significantly higher than those fixed during the IPO of offering prices (offerprice). Note that the withdrawal of shares for exchange trades generates a number of anomalies in the capital market (low long-term return on shares after the market (after IPO), pronounced cyclical primary placements), which are accounted for by successful investors.

Undervaluation of companies in primary public offering is defined as the percentage difference between the price at which shares are sold to investors at the time of initial offering (the bid price) and the price at which shares are subsequently traded on the market. If for companies that issue shares on the stock exchange and attract capital, the undervaluation of shares is a loss, since the shares are sold lower than they could (perhaps below their fair value), then for investors, underestimation is a direct way of constructing winning strategies. The higher the underestimation, the more investors win. Search for issuers with potentially high underestimation when going out to I PO - the basis for building an investment strategy. An important research question: how to diagnose markets and individual companies, for which underestimation can be maximal? What factors of the macro and industrial environment should be taken into account (whether the indicator of market openness, GDP growth rate, industry innovation) is important, what characteristics of the company (financial leverage, ownership structure) and specifics of placement (new issue of shares or sale of shares of existing owners, sale to professional investors or a wide range of non-professionals) should be taken into account. Empirical research shows that the mere fact of undervaluation and the size of the superannuation on the first trading day depend not only on the actions of the main participants of the IPO (the issuer company, underwriter), but also on the characteristics of companies, macroeconomic and other factors. In R. Ibbotson's works it is shown that the phenomenon of underestimation occurs only in certain periods (wavy in these processes, activity grows with the growth of the stock market), J. Ritter revealed that undervaluation of shares with IPO is observed in certain industries (for example, in the oil and gas industry in 1980). Boles of risky IPOs (placement of small companies in terms of revenue) are characterized by a higher size of undervaluation and therefore excess profitability.

On the website of J. Ritter, data on underestimation of primary placements in different capital markets are updated annually. As of the last date (2005), the average underestimation on the segment of 1980-2005. on developed markets is 16.4%, for developing undervaluation is four times more - about 60%. The phenomenon of the United States market is an extremely low level of underestimation compared to other markets (about 4%). This is really a phenomenon, since usually low underestimation is associated with the form of placement, for example through auctions. On the United States market, the form of the "claim book" is accepted. (book building ), which traditionally generates a high underestimation. Apparently, in the market of our country there is a situation when the underwriters are not interested in taking into account the interests of market investors.

The first feature of the "i" phenomenon " - on the first trading day, underestimation is eliminated. The second feature of the shares that have passed the IPO, is the lowered yield on long-term time horizons, when the fixed return on investment in the three- and five-year horizons is lower than the yield of the corresponding sectoral stock indices and valuations but the stock market as a whole. Thus, J. Ritter showed that the three-year profitability of shares bought immediately after the IPO is, on average, 30 percentage points lower than the profitability of shares of companies already traded on the market (35% vs. 62%). These two features allow you to build investment strategies both for entering into the capital of companies that conduct I, and for a timely exit.

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