Group Affiliation And IPO Underpricing Finance Essay

Another issue that is deriving importance among the research workers is the function of group association on the house ‘s public presentation. The researches feel that group affiliated houses are more to hapless administration and have increase dependance on the group houses.

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Sullivan & A ; Unite ( 1999 ) analysed initial and long tally public presentation of IPOs in Philippines during the period of 1987-1997 and tested to happen out the consequence of size of the house, age of the house, clip of launch in market, ownership construction and group association & A ; unaffiliated company public presentation on IPO dumping. They reported mean initial returns of 22.69 % . They besides concluded that IPOs of the companies affiliated with a group are more underpriced as compared to the IPOs of the companies holding no association. The premier ground that has been attributed to this phenomenon has been the information dissymmetry in instance of attached houses. They besides concluded that the chief intent of publishing IPOs by the attached companies is to derive public listing and keep control instead than raising financess.

Khanna and Palepu [ 2000 ] compared the public presentation of group-affiliated Indian companies with stand-alone companies and concluded that group association is a positive signal but this holds true merely for diversified and big concern groups. But most of the surveies in this country has been confined to the station IPO public presentation of the houses.

Dewenter, Novaes and Pettway ( 2001 ) investigated the consequence of group association on the initial public presentation for the IPOs in Japan. Higher cost is being paid by the investors in the signifier of higher IPO dumping in instance of IPOs of group attached companies as they have to incur extra costs in order to analyse the associated with group-affiliated companies.

Carpenter & A ; Rondi ( 2003 ) compared the behaviour of IPOs in USA and Italy. They found that IPOs behave in a really unusual mode in USA and Italy. The houses in USA grow at a really rapid gait as compared to the houses in Italy which grow instead more steadily. They concluded that smaller houses tend to turn faster after the IPO. They besides found difference in the behaviour of group affiliated and independent houses. The group affiliated houses have non shown much growing around the IPO whereas independent houses have grown faster.

Marisetty & A ; Subrahmanyam ( 2006 ) investigated the consequence of group association on the initial public presentation of IPOs. They studied the IPOs issued form 1990-2004 by taking a sample of 2713 IPOs. Under pricing was found to be more in instance of IPOs of group attached companies as compared to IPOs of standalone or unaffiliated companies. They concluded that overreaction of the investors is the chief ground for more underpricing of group affiliated IPOs.


The mandatary and voluntary revelation patterns adopted by companies play an of import function in taking information dissymmetry among the investors. Rock ‘s Adverse Selection Model ( 1986 ) is likely the best available theory about information dissymmetry. The theoretical account is based on the premise that ‘informed investors ‘ have better information about the company every bit compared to ‘uninformed investor ‘ who merely have partial information thereby taking to information dissymmetry. The informed investors tend to purchase merely those issues which are beautifully priced whereas the informed investor ends up purchasing about anything. The companies must offer portions at a lower monetary value in order to bring on these uninformed investors. Some other book edifice theories ( e.g. , Baron, 1982 ; Benveniste and Spindt, 1989 ) have been given which are besides based on similar premises.

Jenson & A ; Michael ( 1986 ) described that at the company degree, good corporate administration assures the optimum usage of house ‘s capital. It besides mentioned that the top direction with free hard currency flows invested in over variegation, which frequently resulted into organisational inefficiencies. This job is more likely to go on when there are weak corporate administration mechanisms.

Simon ( 1989 ) compared the public presentation of IPOs listed on regional exchanges and New York Stock Exchange. He found that dumping was more in instance of IPO ‘s that were listed on regional exchanges as compared to those which were listed on New York Stock Exchange. The New York Stock Exchange had rigorous listing and revelation demands which might hold forced the most volatile Initial public offering to travel to regional exchanges.

Byrd and Hickman ( 1992 ) found that the unnatural bidder returns on the day of the month of coup d’etat command proclamations are significantly higher when the board ‘s determination is likely to hold been made by independent managers alternatively of related managers. This besides suggests that the market believes that independent/outside managers dominated boards are more likely to move in the best involvement of the stockholders.

Pandya ( 1992 ) examined that SEBI ‘s attempts in the way of investors ‘ protection as a regulative and development organic structure of capital market are varied and limitless. The steps taken by SEBI chiefly taps steps for apportion efficiency in the primary market where IPOs be, with just grade of transparence, reforms in the secondary market for doing it crystalline and seeable which would supply the primary market a strong base for its effectual trading, and chiefly the focal point is onto the protection of the puting populace.

Fabrizio ( 2000 ) investigated the function of the prospectus, analyst ‘s survey and investment bankers in distributing the right information to the populace and cut down uncertainness. He found that with the betterment in quality of information provided to the investors through prospectus, the fluctuation in the underpricing has reduced.

Healy and Palepu ( 2001 ) while reexamining the empirical revelation literature found that information dissymmetry is reduced by the voluntary revelations made by the companies but the consequence of compulsory revelations was found to be less in the surveies reviewed. This decrease in information dissymmetry is expected to resul in the decrease of underpricing.

Cremens & A ; Nair ( 2003 ) have verified that the effectual corporate administration relies on both internal and external mechanisms and that they are strong complements. Corporate administration of a house ca n’t be judged by its external building, it besides have many of the internal facts, policies and constructions which make a house base to the corporate administration evaluations.

Committee on Corporate Governance, SEBI ( 2003 ) stated the compulsory suggestions focus on beef uping the duties of audit commissions, bettering the quality of fiscal revelations, including those related to related party traffics and returns from initial public offerings ; necessitating corporate executive boards to measure and unwrap concern hazards in the one-year studies of companies ; presenting duties on boards to follow formal codifications of behavior ; the place of nominee managers ; and stock holder blessing and improved revelations associating to compensation paid to non-executive managers.[ 1 ]The Committee believes that these recommendations represent certain criterions of ‘good ‘ administration into specific demands, since certain corporate duties are excessively of import to be left to lose constructs of fiducial duty.

Yeh & A ; Shu ( 2004 ) scrutinized that the dialogue of the offering monetary value is purely dictated by the soundness of corporate administration construction of the IPO house. Their empirical consequences from 218 Chinese IPO houses for a decennary are by and large consistent with the positive inducement consequence and negative intrenchment consequence. They judge that the result is the consequence of insistent dialogues that involve different involvement parties, viz. the commanding stockholder of publishing house, investment banker, and outside investors. Corporate administration variables serve the link that integrates the implicit in hypotheses in illustration of the willingness and motive of the commanding stockholder, the credence and allowance of the investment banker, and the informativeness of the provided accounting informations.

Ljungqvist ( 2005 ) found that institutional construction affects the underpricing of IPOs in different states. A new dimension was brought frontward by this survey that dumping is less in instance of companies in developed markets as compared to the companies in less developed markets.

Hazem, Charles & A ; David ( 2006 ) describes that after commanding other influences, an addition in overall capital market administration in a state is linked to a lessening in the cost of equity, an addition in market liquidness, and an addition in pricing efficiency. Specifically, improved security Torahs are associated with reduced cost of capital, higher trading volume, greater market deepness, lower monetary value synchronism, and reduced IPO underpricing. These consequences hold for the overall CMG index, and are directionally consistent for each of the three single CMG constituents ) , are cost of capital ( both realized and implied ) , market liquidness ( i.e. , trading volume and market deepness ) and pricing efficiency ( i.e. , stock monetary value synchronism and IPO underpricing ) .

Shi, Pukthuanthong and Walker ( 2006 ) examined the consequence of state specific revelation patterns on the IPO underpricing by taking a sample of 6025 IPOs from 34 states. They found negative association between revelation ordinances and IPO underpricing. The states holding strong auditing patterns have shown more negative association between revelation patterns and dumping due to the fact that strong audit patterns and revelation have been moving as replacements in taking information dissymmetry.

Bedard & A ; Coulombe ( 2007 ) contributed to the argument environing the effectivity of administration patterns by analyzing IPO houses ‘ determination to voluntarily make an audit commission, and the consequence of administration features on the quality of revelation as measured by direction prognosis mistakes and on the cost of capital as measured by IPO dumping. Their consequences seem to bespeak that the creative activity of an audit commission is more likely when the board of managers is larger, a higher proportion of its members are independent and it is non chaired by the house ‘s CEO. Governance features do non look to impact the quality of fiscal information issued by IPO houses.

Boulton, Smart & A ; Zutter ( 2007 ) suggested that IPO initial returns are greater in states offering stronger protections to investors. These consequences hold for assorted country-level placeholders of administration and are both economically and statistically important. In those states, that offer lower degrees of investor protection, dumping is less likely to be used as an instrument to restrict legal liability or to keep control because managerial control is inexplicit due to a general neglect for investor ‘s rights, taking to take down initial returns ( on norm ) in these states.

Larry ( 2009 ) mentioned that the ownership building has a bearing on corporate administration ; legal units every bit good as foreign ownership have an influence on long tally public presentation. It besides mentioned that the outside managers and the issue stock exchange have no significance influence. Those houses which are holding high growing potency and immense base are considered more extremely by the market.

Kumar & A ; Singh ( 2010 ) argued that the policy on Corporate Governance would be effectual merely if it empowers the direction of the Company and at the same clip besides offers a system to look into the determination doing powers that has been vested to the top direction. It should besides be able to run into the outlooks of all the stakeholders. Corporate administration is besides concerned with the moralss, values and ethical motives of a company and its managers.

Boulton, A Smart & A ; ZutterA ( 2010 ) described that underpricing is a cost that is paid to keep the control by insiders in states with legal systems. They reported negative relation between dumping and post-IPO outside block retentions but a positive association with private control benefits.

Hearn ( 2010 ) findings suggest that the constitution of independent audit and wage commissions to supervise managers and insiders is at best otiose with their presence really increasing degrees of asymmetric information and underpricing. However the separation of the functions of CEO and Chairman and the founder-entrepreneur cession control of CEO function are good mechanisms in signaling quality to possible outside investors.


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