Department of Finance

Finance: Assignment

General Information

1. This assignment makes up 30% of your total assessment in this unit.

2. Due Date: Monday, 4 May 2015 (Week 8), no later than 5:59 pm (AEST). A request for a time extension must be made in writing to the Unit Chair, Dr Mong Shan Ee: [email protected] at least one day before the due date. This request must include documentary evidence, such as medical certificate. Please note: since students will have several weeks to complete this assignment and are expected to make good use of this time, being unfit on the due date or just one or two days prior to the due date, may not be an acceptable ground to get an extension. Assignments submitted after the deadline without an extension approved by the Unit Chair will not be marked.

3. This assignment must be completed in a group of two (or individually, if prior permission has been obtained from the Unit Chair). MPF953 students must make an individual submission. The first page of your assignment report must clearly show the full names and student ID numbers of both group members.

4. The word limit is 2,500 words (excluding tables, figures, appendices and reference list).

Deakin Graduate Learning Outcomes

1. Discipline-specific knowledge and capabilities: appropriate to the level of study related to a discipline or profession.

2. Digital literacy: using technologies to find, use and disseminate information.

Case study - IPO Under-Pricing

A written report of 2,500 words max. (excluding tables, figures and references)

Background

Alibaba's IPO (initial public offering) is currently the world's largest initial stock offering, raising $25 billion for the company. Alibaba, a Chinese e-commerce firm, made its stock market debut at the New York Stock Exchange on 19 September 2014, with an initial offering price of $68 per share and closed at $94.89, representing an increase of 38%. This big first-day pop in the share price prompted its underwriters to exercise the option to purchase an additional 48 million shares, taking the total number of shares sold to 368 million (Chen et al., 2014b). Alibaba's IPO has boosted the net worth of its founder and chairman, Jack Ma, to over $16 billion, making him the richest man in China (Chen et al., 2014a).

Questions-

Inspired by Alibaba's IPO success, Jeff Parker, the CEO of Dynamic Technology Solutions, a internet-related service company, is planning to raise equity through an initial public offering. Jeff is going to propose the plan to the company's major shareholders, but worries about resistance from some of the shareholders, who are known to be conservative. He remembered from his MBA finance course that many IPOs in the US were issued at prices substantially below the first day closing market prices. However, he was not sure whether the short-run IPO under-pricing phenomenon exists in the Australian stock market. Jeff asks you, the Chief Financial Analyst, to investigate and prepare a report on the following issues.

1. Short-run IPO under-pricing is a well-known phenomenon in the US stock market. But is this phenomenon unique to US IPO firms only? In other words, does this phenomenon perhaps also exist in the Australian stock market? To answer this question, you need to investigate the shortrun IPO performance in the Australia stock market. To measure the short-run IPO performance, you will have to calculate and analyse the initial return of IPOs that were listed on the Australian Securities Exchange (ASX) from 1 January 2012 to 30 June 2013. The initial return (Ritter 1991, p. 7) equals: [ (The last trading price at the end of the first day of trading - initial offering price) / initial offering price ] * 100.
Download the list of IPO firms with their issue price and the first trading day closing price from Morningstar DatAnalysis Premium. The initial offering price is called the issue price in DatAnalysis. Ignore those IPO without issue price in the spreadsheet downloaded from DatAnalysis. Also, make sure you select the adjusted price for the closing price. Describe the sample selection process.

Critically analyse the results of your calculation using the entire sample and describe the insights that could be gained from the calculation. For instance, you could describe the results of the analysis using simple descriptive statistics, such as mean, median, etc., or the frequency
distribution. Next, categorise your data/calculations into groups using three variables (e.g. industry) and describe what additional insights you could gain from the analysis. You will decide which grouping variables you will use and provide justification(s) for your selection. You should also list any assumptions made in the analysis.

Wherever appropriate, the summary of your analysis and/or results (e.g., in a brief table, chart or graph) should be presented in the main text of your report. However, the data, detailed calculation/analysis and results should be presented in the Excel spreadsheet, which must be
embedded in the Appendix section of your report. Note that 2 marks are allocated for organising and presenting the calculation/analysis and results in the embedded Excel Spreadsheet and report. In addition, you must properly reference (Harvard style) all sources of information used.

2. Select and discuss two theories/propositions that in your opinion provide the most plausible explanations for the occurrence of short-run IPO under-pricing in the US and/or Australian stock market. Perform some background research and use the findings to justify your selection. You are expected to use at least two academic references for this task. You may use articles from journals or textbooks, but not Wikipedia, Investopedia or other non-academic Internet websites. You must properly reference (Harvard style) all sources of information used.

3. Pick one stock market from the Asia-Pacific1 region (excluding the Australian stock Market). Perform some background research and then describe one study that empirically investigates the existence of short-term IPO under-pricing in the selected stock market. To answer this
question, you are expected to describe the study (including the research methodology used to examine the existence of short-term IPO under-pricing in the selected stock market) and the empirical results on the degree of short-term IPO under-pricing, and discuss the reason(s) proposed by the study to explain the existence of under-pricing in relation to the two theories discussed in Question (2). In attempting this task, you are expected to use at least three academic references. You may use articles from academic journals or textbooks, but not Wikipedia, Investopedia or other non-academic Internet websites. You must properly reference (Harvard style) all sources of information used.