By selling the shares below value, it is believed that any rational investor would be enticed. Rational investors would know that when full information about the company comes to light, the market price of the shares will move to the true, rational value point. Thus, their investment during the IPO process would virtually guarantee them a profit. An overpriced offering is one in which the shares are priced above the book or reasonable market value. Typically, a firm that overprices an offering understands that the offering will not sell out but is willing to accept this is return for a higher price. Alternatively, an issue may be overpriced if the issuing company believes that the market is irrational (such as during the dot-com boom, for example). In that scenario, the issuer would know that the market price is not the real equilibrium value of the firm but would also know that they can extract higher than normal value from their IPO simply because of the irrational behavior on the part of investors. Should the stock return to its equilibrium value later, the company is unaffected, and will have gained unusual profit from its initial public offering.

In order to determine if an issue was over- or under-priced, the best method is to examine the results in the market after the issue has gone public. This is because in a rational market, the firm's share prices will move to their fair value, assuming perfect information. Thus, that market price is a good estimate for fair value, once the issue has found price stability. Thus, we shall examine the performance of Winchester stock since the issue vs. The issue price in order to determine whether the issue was overpriced or underpriced or if it was fairly priced.

In the case of Winchester, the shares have barely traded since the issue. They went up initially, but subsequent trading has brought them back to $0.205. The price in the prospectus was $0.20. This indicates that the shares were underpriced only slightly, or were fairly priced. However, the lack...

One is that there is not enough liquidity in the market -- illiquid markets can have distorted prices.
The other is that perhaps investors are unwilling to trade in the company because they lack sufficient information. If investors only have information in the prospectus to work with, then it is reasonable that they will be unwilling to pay more than the prospectus price. Thus, it would appear that the Winchester Resources issue was fairly priced, with a caveat that illiquidity and low investor information may be distorting the true price equilibrium.

Works Cited:

Winchester Resources prospectus. (2009). Retrieved December 23, 2009 from http://www.winchesterresources.com.au/userfiles/file/22_wr%20prospectus.pdf

Suruhanjaya Sekuriti. (no date). An IPO prospectus -- what every smart investor should know. Suruhanjaya Sekuriti. Retrieved December 23, 2009 from http://www.sc.com.my/eng/html/resources/inhouse/ipobi.pdf

Australia Securities Exchange website, various pages. (2009). Retrieved December 23, 2009 from http://www.asx.com.au

Australia Securities and Investments Corporation website, various pages. (2009). Retrieved December 23, 2009 from http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Starting%20a%20company%20or%20business

Carew, E. (2009). The language of money. ANZ Bank. Retrieved December 23, 2009 from http://www.anz.com/edna/dictionary.asp?action=content&content=company

Berman, J. (2009). The role of an underwriter. Street Directory. Retrieved December 23, 2009 from http://www.streetdirectory.com/travel_guide/29033/business_and_finance/the_role_of_an_underwriter.html

Handley, J. (2009). Cost of raising debt and equity capital. Australian Energy Regulator. Retrieved December 23, 2009 from http://www.aer.gov.au/content/item.phtml?itemId=728124&nodeId=0999f3e8fcc48ed375f38ce6ffa7fe7e&fn=Handley%20report%20on%20debt%20and%20equity%20raising%20costs%20%28April%202009%29.pdf