1. “Why New Issue are Underpriced?” and “IPO and Underwriter Reputation”
Diniloisvina Sumsun
Gezy Megalitta
Novy Yana

2. Why New Issue are Underpriced?
Kevin ROCK
Journal of Financial Economics
1986

3. Introduction

4. Introduction

5. Model Assumption

6. Demand for New Issue

7. Implication-Uninformed Investor

8. Implication-Uninformed Investor

9. Implication-Issuer

10. Conslusion

11. Initial Public Offerings and Underwriter Reputation
Richard Carter, Steven Manaster
Journal of Finance
1990

12. Literature Review
IPO returns are required by uninformed investors as compensation for the risk of trading against superior information (Rock, 1986)
Empirical regulity of IPO underpricing (Louge 1973; Ibboston 1975; Miller and Reilly 1987)

13. Research Question
What is the correlation between prestigious underwriter with low risk offering?

14. Main Result
Prestigious underwriter are associated with lower risk offerings
With less risk there is less intensive to acquire information and fewer informed investors
Consequently, prestigious underwriter are assosiated with IPO that have lower returns

15. Model Assumption A1 There are three time periods Time Period Event
Issuing firm contract with marketing underwriters to sell their IPO on a “firm commitment” basis in the primary market 1
The underwriter sells the IPO in the primary market 2
The shares of the IPO trade in secondary market

16. A2 There are two markets, a primary market and a secondary market
A3 Differences in issuing firms
A4 Investor are risk neutral
A5 Informed investors, do not have sufficient wealth
A6 All IPO are oversubscribe
A7 Critical for the model’s development, in the nature of the asymmetric information in the primary market

17. Empirical test for the model
Investor’s Choice

18. Empirical test for the model

19. Empirical test for the model
B. The Uncertain and Underwriter Reputation

20. Empirical test for the model
C. The matching of Underwriters and
Issuing Firm
The foregoing model predicts that the price run-up for issuing firms will be less for underwriters with greater prestige. Implicit in the model is the supposition that investment banking firms choose to develop reputations and that issuing firms will employ underwriters with a reputation appropriate for the a level of their IPO. Reputation development and maintenance are exogenous to our model. In this section, we provide an intuitive explanation of the role played by reputation in the matching of investment bankers and issuing firms.

21. DATA
Data Description
The Underwriter Reputation Variable

22. Methods and Result
Hypothesis Tests : The Variance of Possible Firm Values
Hypothesis Test : Price Run-Up

23. Summary and Conclusion
We have presented an empirically testable model of initial public offerings of equity. The model is consistent with the work of Rock (1986). He argued that IPO price run-up compensates uninformed investors for the risk of trading against superior information. The extend this theory to suggest that the greater the proportion of informed capital participating in an IPO, the greater theequilibrium price run-up. Because investors have scarce resources to invest in information acquisition, they will specialize in acquiring information for the most risky investments. With a migration of informed capital to the IPOs with the largest dispersion in possible secondary market values, these will experience the greatest price run-up.

24. Thank you
for your attention