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Most IPOs, however, are underpriced, meaning that the company is priced at a level that reflects a lower net worth than the company actually has. The result of this is that the IPO attracts more investors (Pons-Sanz, 2005). While the issuer does not receive fair value for the equity stake it is selling, the issuer does benefit from underpricing an IPO in that it virtually guarantees a fully-subscribed issue. An overpriced IPO, by contrast, can yield more investment capital for the issuer but bears greater risk that the issue will not be fully subscribed. The ideal price of the IPO strikes a balance that allows the firm to generate the greatest amount of capital.
The Winchester Resources shares were issued at 20.5 cents per share. There has been very low volume on the issue, and Winchester currently sits at issue price (ASX.com, 2009). Therefore, it is reasonable to conclude that Winchester Resources' shares were priced correctly at IPO. The shares rose briefly, but that rise was quickly reversed. In an efficient market, prices trend towards equilibrium. That has happened...
It should be noted, however, that the low trading volume on Winchester shares indicates that the market for these shares is not yet sufficiently liquid as to give a strong, reliable indication one way or the other with respect to the nature of the company's IPO price. The information we have at this point indicates correct pricing, but the low volumes preclude the ability to make a definitive determination of such.
Works Cited:
Australian Stock Exchange. (2009). ASX Listing Rules. Retrieved December 23, 2009 from http://www.asx.com.au/ListingRules/chapters/Introduction.htm
Winchester Resources Prospectus. Retrieved December 23, 2009 from http://www.winchesterresources.com.au/userfiles/file/22_wr%20prospectus.pdf
Pons-Sanz, V. (2005). Who benefits from IPO underpricing? Evidence from hybrid bookbuilding offerings. European Central Bank. Retrieved December 23, 2009 from http://www.ecb.int/pub/pdf/scpwps/ecbwp428.pdf
ASX website, various pages. (2009). Retrieved December 23, 2009 from www.asx.com.au
Works Cited:
Australian Stock Exchange. (2009). ASX Listing Rules. Retrieved December 23, 2009 from http://www.asx.com.au/ListingRules/chapters/Introduction.htm
Winchester Resources Prospectus. Retrieved December 23, 2009 from http://www.winchesterresources.com.au/userfiles/file/22_wr%20prospectus.pdf
Pons-Sanz, V. (2005). Who benefits from IPO underpricing? Evidence from hybrid bookbuilding offerings. European Central Bank. Retrieved December 23, 2009 from http://www.ecb.int/pub/pdf/scpwps/ecbwp428.pdf
ASX website, various pages. (2009). Retrieved December 23, 2009 from www.asx.com.au
This is done primarily to attract buyers to the offering. 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
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