Initial public offerings 1

Published on January 18, 2015   33 min
Hello, this is Jack Cooney from Texas Tech University. I'm going to talk about initial public offerings.
As I say here, the initial public offering of common stock is probably the most important capital raising event for a corporation. It's typically a very large offering with respect to the outstanding shares of the company. There's a lot of valuation uncertainty, obviously, with respect to the initial public offering. This stock has not been publicly traded before, so we don't know what it's worth. So the investment bank that takes it public has to gather information from the issuing firm and from purchasing investors to try to determine their appropriate offer price. The company obviously gains access to the public markets for the first time, so they can now start issuing common stock to the public through regular stock offerings, season stock offerings. And then also there are now reporting requirements. They have to start filing their financial statements. This provides information to potential investors that are interested in purchasing this stock, but it also provides information to competitors of the issuing firm and takes away maybe some of the advantages the firm might have as a private firm. So firms often have to decide, do I want to become a public firm and gain access to the public markets and offset that with respect to the reporting requirements and providing information to competitors.
So let me give a quick outline of what the lecture is going to look like. What I'm going to start off with is an overview of the US IPO market, a bunch of facts about the market. I've drawn this from Jay Ritter's website, who has an excellent summary of the IPO market here in the United States. I'm going to do an example of a recent IPO, basically the Twitter IPO. I'm going to pull several aspects of the Twitter IPO and show you some of the items I'm going to be talking about later in the lecture. As far as my main topics for the lecture, I'm going to be talking primarily about underpricing. I'm going to start with the rock model, which is a winner's curse model. Then I'm going to talk about investment bank certification, venture capital certification, and then this partial adjustment phenomenon or partial adjustment effect, which is a major determinant of the amount of underpricing for an IPO. I'm then going to talk about three different market imperfections that impede price discovery in the IPO market, in particular price stabilization or price support, the quiet period, and the lockup period. And then I'm going to talk about just briefly at the end of the lecture several other topics, analyst conflicts of interests, this changing incentives of issuers and investment banks that we've seen lately, fees or growth spreads paid to the underwriter, the informational content of the prospectus, how that might vary from prospectus to prospectus, competitive effects of IPOs. How does an IPO affect competitor firms? And then long-run returns. So that's what I'm going to be doing.