The Phenomenon of IPO Underpricing in the European and U.S. Stock Markets

Table of Contents

1 Introduction

1.1 Problem Statement

1.2 Methodological Approach

2 Initial Public Offerings

2.1 The IPO

2.1.1 Typology and Motivation

2.1.2 Disadvantages

2.2 Going Public

2.2.1 The IPO Process

2.2.1.1 Phase I: Preparation of the IPO

2.2.1.2 Phase II: Structuring & Valuation

2.2.1.3 Phase III: Marketing & Roadshow

2.2.1.4 Phase IV: Pricing & Trading

2.3 Exchange Listing

2.3.1 Requirements in Europe

2.3.2 Requirements in the U.S.

3 IPO Underpricing

3.1 Definition

3.2 Motivation and Impact

3.2.1 Information Asymmetry

3.2.1.1 Between Groups of Investors

3.2.1.2 Between Underwriter and Investors

3.2.1.3 Between Underwriter and Issuer

3.2.1.4 Between Issuer and Investors

3.2.2 Institutional Explanations

3.2.3 Ownership and Control models

3.2.4 Behavioral Explanations

4 Evidence of IPO Underpricing

4.1 The European Stock Market

4.1.1 Data Base and Descriptive Statistics

4.1.2 Interpretation

4.2 The U.S. Stock Market

4.2.1 Data Base and Descriptive Statistics

4.2.2 Interpretation

4.3 Consequences

5 Conclusion

Objectives and Research Focus

This thesis examines the phenomenon of IPO underpricing within European and United States stock markets. It aims to clarify the definition of underpricing, identify the motivations driving this occurrence, and provide empirical evidence regarding the presence and magnitude of underpricing in these major capital markets.

• Examination of the IPO process, valuation methods, and regulatory requirements in Europe and the U.S.
• Theoretical analysis of information asymmetry, institutional factors, and behavioral models related to underpricing.
• Comparative analysis of IPO performance in European and U.S. markets between 1997 and 2012.
• Investigation of specific case studies, including the Facebook and Visa IPOs, to analyze lockup effects and market behavior.

Excerpt from the Book

Summary of Chapters

1 Introduction: This chapter defines the scope of the thesis, introduces the problem statement regarding IPO underpricing, and outlines the methodological approach used for the analysis.

2 Initial Public Offerings: Provides a comprehensive overview of the IPO process, including typology, motivation, various listing requirements in Europe and the U.S., and the practical stages of going public.

3 IPO Underpricing: Discusses the theoretical framework of underpricing, covering information asymmetry, institutional explanations, ownership/control models, and behavioral finance perspectives.

4 Evidence of IPO Underpricing: Presents an empirical investigation of IPO performance in Europe and the U.S. from 1997 to 2012, utilizing descriptive statistics and case studies to validate theoretical underpricing models.

5 Conclusion: Synthesizes the findings of the thesis, answers the central research questions, and summarizes the systematic nature of IPO underpricing as observed in both markets.

Keywords

Initial Public Offering, IPO, Underpricing, Stock Market, Europe, United States, Bookbuilding, Information Asymmetry, Efficient Capital Markets Hypothesis, ECMH, Institutional Explanations, Behavioral Finance, IPO Performance, Market Listing, Underwriter

Frequently Asked Questions

What is the core subject of this master's thesis?

The thesis focuses on the phenomenon of IPO underpricing, specifically analyzing why companies often sell their shares at prices significantly lower than their first-day market value in European and U.S. stock markets.

What are the central thematic fields covered in the study?

The study covers the IPO process, mechanisms of pricing (such as bookbuilding), regulatory listing requirements, theoretical explanations for underpricing, and comparative empirical evidence from historical data.

What is the primary objective of this research?

The primary objective is to investigate why IPOs are generally underpriced, identify the theoretical drivers behind this, and empirically test these theories using data from European and U.S. markets over a 15-year period.

Which scientific methods are employed?

The work utilizes a combination of theoretical literature review, comparative analysis of listing requirements, and descriptive statistical analysis of historical IPO performance data retrieved from databases like Bloomberg and Deutsche Börse.

What topics are discussed in the main body?

The main body covers the mechanics of going public, detailed theories on underpricing (asymmetry, institutional, behavioral), and a comprehensive empirical evidence section comparing market performance and the impact of the dot-com bubble and subsequent crises.

What are the key terms characterizing this work?

The work is characterized by terms such as Initial Public Offering, IPO, Underpricing, Information Asymmetry, and Market Efficiency.

How is the Facebook IPO analyzed in this context?

The Facebook IPO is used as a case study to illustrate the intervention of underwriters in price stabilization and to explore how high-profile IPOs can deviate from standard performance patterns due to market expectations.

What role does the lockup period play in IPO underpricing?

The study highlights how the lockup period, which prevents insiders from selling shares immediately after an IPO, influences their motivation to strategically underprice shares to ensure a price increase at the time of expiration.