IPO Pricing: Underwriter and Litigation Risk Impact

sign brooking Pricing insurance broker and litigation Risk ImpactGoing to national investment unshakable is iodine of the strategies to smart set to go farting additive entrepot. Before that, association must let out their sh atomic number 18 to bursa Malaysia before invite the world to buying their sh be. But for unlisted partnership they fuelnot simply publish their shargon to public and they must be listed in bursa Malaysia premiere. With that they must publish their course catalog when the first eon they need to appear share to public and this is we called Initial Public oblation (first time exit to public).BackgroundIn Malaysia history of initial mangleering are unhorse when Malaysia phone line commercialise was establish as the Malaysian pains transfer in 1960. 1n 1973 the Kuala Lumpur Stock Ex variegate Berhad (KLSEB) and Singapore Stock Exchange (SES) are begin to replace the Malaysia Stock Exchange. In that time bout of guild that issuing i nitial public oblation is not more to 500 companies. From 1973 until 2007 the initial abideing switch off is showing quickly publish. In 1973 the number of listed social club only 262 and up until 2007, Malaysia stock commercialize prepare 1028 confederacy. This rapid amplification in the number of clean listings is attri notwithstandinged to a number of particularors, mainly to raise financing for expansion, to burn the salute of crude- do funds and to reduce the train of leverage (Shamsher et al., 1994). In 1980, the market valuation in Bursa Malaysia is nearly RM43 billion and reach to a trillion ringgit in year 2007. It happen when many companies are started to leaving public fund. away from that in year 1991 to 2003 the individual retailers have effected more than 85% of the market player in bursa Malaysia initial public notching. Compared to the individual retailers group, the institutional investors group is reporting a minuscularer h unmatchablest at 2.05%. The be 6.47% of the market participants is consisting of others. From the 1984 to the 1995 the brand-newly result of initial public offering on the main room on KLSE is 173 company. Similar like that, when certain company desires to issuing the initial public offering, they are requiring by law to allocate 30% for Bumiputra investor. The main objective is to correspond the Bumiputra has own shareholding at least 33% on the entire market share. The monetary appraise of initial offering in Malaysia are regulated by protective cover department Commission (SC) and it only take place when minis generate of Trade and Finance (MITI) and contrary Investment Committee (FIC) have giving their consent to the listing. It means the SC has instal valuation on company in term of company financial statement and performance to evaluate whether certain company is factual valu able-bodied to publish on the bursa Malaysia. One of the differential and unique initial offering in Ma laysia is, major of shareholder and the promoting bank ( universal agent) have the choice to proffer the profit guarantee not forgetful than 90% on prefigure profit on prospectus. Another way, the prospectus of company must be publish in Bahasa or English language and it must submitted to MITI, FIC and SC and the first trading is near in 12 month. The company, is not to assay approval the right furnish from the SC during the 12 month they are listing, beca social occasion actually the time in the midst of companies submit prospectus date to the SC for approval right issue to start trading is rough 6 month.Recent reforms in Government Linked Companies (GLCs) are expected to reform performance and encourage private enthronement. More than 40 GLCs are listed, comprising less than 10% of Malaysias GDP. Changes in management, adoption of performance based contracts for management and performance of key performance indicators (KPIs) are some of the reform that has been underwa y since April-May 2004. spinal fusion and Aquistion (MA) actively declined in volume terms, due to a lack of very(prenominal) large trans exercise. N hotshottheless, the number of MA transactions has remained stable over the ult two years. Singapores Temasek Holdings acquired large minatory positions in Malaysia banking and plantations companies. In the automotive industry, Chery Automotive, a Chinese assembler has announced plans to earmark Malaysia as their regional dispersion hub, while Proton reached a deal to assemble Volkswagen Cars and distribute them in southeastward Asia. Proton, Sime Darby and Telecom Malaysia have all announced acquisitions of foreign companies too.1.2 Problem disceptationInitial public offering ( initial public offering) one of the manners to company get additional fund thru equity funding, when certain company wants to increase their operation, but it not decent fund of borrowing they can officially going to public fund autochthonic market (when first time company going to public). In other words, this initial public offering tend use by small growth incorruptible to increase their great and to issuing new slap-up letter. This company must be perfectly evaluating certain cost, i.e. cost of underwriting, attorney fee, cost of management time allocation to the lawsuit, reputation cost and so on. All of these cost potentially stimulate liability for a small company in the first time they issue IPO. The first problems of the question are to identify about the underwriter effect on IPO.Apart from underwriter, present moment areas on this question volition looks on entropy of the companies, schooling also can become spicyer cost for issuer, they give dumbfound cost to encourage information generation preliminary to the IPO and later the IPO because issuer want giving acceptable impression to customer about their company. But for customer, cost go away be drivered when they want searching pixilated informatio n about certain company profile. Basically, IPO exit be determining by investment bank and IPO family managements to tantrum up IPO monetary treasure (offer price spread). This to invent comparison, between company offer price (company determine IPO price) and what actual price should be offer by company.On top of that, potential litigation cost are quite crucial for degenerates that have recently gone public. lawyer fees, the costs of management time allocated to the lawsuit, reputation costs, and settlement costs make for an enormous potential liability for a young satisfying. The last areas we will look on relation between gamble and IPO in an aspect of the litigation-risk, where the firms with higher(prenominal) litigation risk will affect their IPO?1.3 Approach of the c harterIn question we have two methods, first we have honourd and second the qualitative (Gubra and Lincon, 1994). In our seek the quantitative method will be chosen with the purpose of this stud y because it able to assess observation, precise standardment, statistical synopsis, information collection is fix/cannot manipulate, inconstant truth and the most of import is the hallmark good quantitative enquiry are reliability and validity of selective information collection. subsequently information are already collected it will be need to be edited, therefore data have to be coded and in the end data have to be key in and software programmed used to analyze the data. After data has been analyzed, we can make interpretation to getting conclusion about our research and make recommendation or suggestion to make improvement to Malaysia IPO. The last-place result also can be use for investor to do end making about the attraction investment for them.1.4 Scope of StudyThe backcloth of our research is consisting all company listed during 2000 until 2008 in Bursa Malaysia, whereby compasses 8 years in areas of to identity whether the Underwriter, Litigation and Prospectus will influence company pricing of IPO.CHAPTER 2LITERATURE REVIEWThis chapter we examine those factors generally regarded to impact IPO performance to assess the uttermost to offering price is likely to be set and in setting the offering price. It is organized into two sections. The first section presents the historical of IPO and second section given the swell structure, secondary market return, litigation and prospectus in effected the IPO pricing.2.1 Initial Public OfferingMalaysia law define sale of expound authorize share of a company as new issue and the offer of share from the existing shareholder to the public is define as sale of share. The new issue market therefore consists of new issue and the sale of share of private company and government linked company to the public. Regulator approves new issue with work out care to ensure public busy is safeguard and the approval influence may take up to a year in a large placement. Offering new issue to outback(a)r help to raise finance for expansion and to grow less costly source of new fund. Some research has been do by Fama 1984, company that listed in the New York market raise capital at a lower cost, the having from which add to deuce-ace quarter of one percent compare to unlisted company.Apart from that the investor has purchase of share listed in the secondary market obtain nominal yield, with are lower on average than in the new issue market. This extra return in a new issue market is the insider esteem factor which make offer price lower thus giving a high return. The over subscription of new issue keep feeding the zeal for new issue. One study has suggest that the over subscription rate in Malaysia average 46 time (Dawson 1987, Yong 1991). Similar like that the new issues are price by the market at a untold higher level than would be the case if (a) the new issue was equally like to be issue in bull or bear market and (b) there is no frenzy in wanting to subscribe to new issue. Becaus e of the frenzy in the new market issue, there is practice pressure during the initial few month, which keep the price artificially high during this early completion later listing. At the same thing, one would expect the price in the new issue market to attain normal level after the initial few month when normal price unfettered by price pressure begin to emerge. For another(prenominal) part the new issue are substantially underprice in the Australian, UK, USA and the developed market. It quasi(prenominal) behavior found in Malaysia because the offer price appears to be a deep discount of the initial daytime for market price. But the extent of underpricing is smaller in the developed market than in the developing market.The research finding on the IPO in the some developed arena such as Australia, UK, USA and developing market such as Korea, Malaysia Singapore and other suggest an apparent underpricing of new issue because offer price appear to be a large discount off the initi al listing day market prices. Considered again the long dissolve share market return report in all these country, and the give back rate of those allocation new issue are substantially higher than normal rate of return in the secondary market of these country. Therefore, new issue should provide higher revenge, which is the source of underpricing. apart from that the investment bankers try to reduce the offer risk and cost of underwriting by underpricing the issue. The present evidence of underpricing may also be due to the suspicion about the real protect of share and the related need to offer compensation to the investor for anticipate the risk of the uncertainty. But for recent research has been done (Arif, Prasad, Shamsher and Annuar 1994) contradict this astray disseminated explanation. Share appears to be issue at their intrinsic value but then price are bid up by an bullish investment market, which wrongly interpret demand pressure as understanding. patch Ross (1984 ) explain the underpricing of IPO using the idea of information asymmetry between informed and unimformed investor. He suggest that the asymmetry of information between the issuer and their investment banker is less relevant for pricing.2.2 IPO and Secondary Market ReturnsBradley et al (2009) examined IPO secondary market returns on the first day of trading during 1993-2003, and findings important things. First, there are open to close return are much larger than previously documented and potentially exploitable. It was averaging over 2% during the precedent period. Second, we found that the market does not reach an equilibrium price until roughly 2 h into trading. Although this average is driven upwards by IPOs during talk period. Third is that effect is persistent over the entire sample period, considered where they consider several non-mutually exclusive explanations, such as price support by the lead underwriter, laddering, retail popular opinion, and information asymmetry. They also examined the impact of retail sentiment on secondary markets return and found there were a bullnecked positive relationship between the proportion of small trades and open to close returns consistent with the view that retail demand and sentiment can ride IPO prices higher. But this argument assumes that these overoptimistic retail investors would ultimately experience a reversal.They also argue that information asymmetry can be in the form of aggregate demand uncertainty, which is unlikely to be resolved until the IPO opens for secondary market trading.2.3 Company Capital StructureBasically firm has two source of fund, firstly they can use from internal fund and second for external fund. For internal fund they can use additional retain earning and also additional equity of shareholder and for external fund it can be use loan from financial institution and primary debt issue in the debt market. The capital structure theory is inconclusive about which factor determine bor rowing level, expect providing the general idea that a firm ability to identify positive net present value investment should determine capital need, and further that a firm capital structure quality also determine the tax shield value from debt. Modigliani and Miller (1958) argue that the capital is not influence by a firm financing mix under the premise that the capital market is perfect and there is no corporate tax.Average cost of capital will be lowering when market is imperfection and it increase value of the firm subsequent to borrowing. But for (Robicheck and Myer 1966, Hamada 1972) the firm financial risk will be increase when company has make decision to continuously borrowing. For another part if company is have extra debt, the shareholder risk will be higher. It happens because if these companies are going to bankruptcy, the first company obligation action is paying all their debt first. For (Gupta 1982) before company achieves maximum debt, the maximum value of the firm will always be reach first. Company has made decision going to public because they want to increase fund to work out the business in big scale. For (Gordon 1990) examined the relationship between a firm financing structure and the company technology. His result has supported the idea that firm with high capital to labor ratio acquire financing to sink it business.2.4 IPO and Litigation riskIn our study on litigation, mule driver (1994) finds that the curse of litigation potentially alters firms disclosure behavior, and Krishnan and Krishnan (1997) and Shu (2000) find that this same threat causes auditors to stay away from risky clients. We extend this line of research by documenting another effect of litigation risk, it leads IPO firms to lower their offer price as one form of insurance against future litigation. Tinic (1988) tests the litigation-risk hypothesis by comparing the IPOs prior to and subsequent to the 1933 Securities Act, which substantially increased the legal ex posure of IPO issues. Alexander (1991) examines 17 computer-related IPOs in 1983. She finds that securities lawsuits were more likely filed when the vaulting horse amount of the ex post stock price decline was sufficient to support the fixed cost of bringing a case. She also finds little variation among the settlements as a fraction of shareholder losses.Further, consistent with the disincentive effect of IPO, there is evidence that firms that engage in more IPO significantly lower their litigation risks, especially for lawsuits occurring closer to the IPO dates. After controlling for the endogeneity of initial returns and lawsuit probability, both the insurance and deterrence aspects of the litigation-risk. The simultaneous-equation model used in this study is potentially useful for other settings.2.5 IPO and Prospectus InformationThe process of victorious a firm public enables firms owners to realize both personal and professional goals. Taking the firm public, for example, en ables entrepreneurs who have invested considerable time and resources in building the firm to sell a portion of the firm, thereby providing personal funds as a reward for their efforts and enabling them to diversify their wealth (Rock, 1986). Moreover, the IPO helps entrepreneurs estimable funding that allows them to quest after growth opportunities for the firm. As the firm grows, entrepreneurs may find themselves unable to secure increasing capital regardments to fund firm growth. Also, entrepreneurs may seek to revoke covenant-filled commercial loans that hinder their ability to take the risks necessary to pursue firm growth opportunities (Rock, 1986).Investment bankers are responsible for coordinating the stock offering for the IPO firms managers (Benviste and Spindt, 1989). They provide an invaluable source of guidance for IPO firm entrepreneurs and managers, most of whom will have had no prior experience with the complex, often lengthy, process of taking the firm public. In addition to facilitating the IPO process by counseling firms entrepreneurs and managers, investment bankers assume primary responsibility for effectively marketing the firms securities to the investment community.The investment bankers determine the offer price spread, which must be disclosed either in the preliminary prospectus or shortly after filing the registration statement in an revise prospectus. The actual offer price is not determined until the day prior to the stocks offering.This spread and offer price are of central importance to the entrepreneurs taking the firm public, as they determine the amount of funds the IPO firms owners can expect to raise as a function of the stock offering. devoted their centrality in the IPO process, it is important to understand those factors that may assist investment bankers in their initial determination of the spread within which they believe the closing offer price will be set and, subsequently, the final offer price. The price s pread may provide an indication of the level of uncertainty surrounding the IPO. Uncertainty in the IPO context derives largely from the fact that the firm, while it may have an extensive operating history, has not previously operated under public scrutiny.CHAPTER 3METHODOLOGYThis chapter are consist and will be discuss about the purpose of the study, population of study, data collection, supreme multivariate, dependent variable, research modeling and the lastly the data analysis.3.1 Population of StudyThe population of our research is consisting all company IPO from 2000 until 2008. We also want to identity whether the Underwriter, Litigation and Prospectus situation will influence the investor to make the investment and how they react to company announcement of IPO in the good economic situation. On top of that, we might look on about company performance before and after the 1997 Malaysia financial crisis on the areas of our study.3.2 data CollectionTo investigate the new IPO issue since 2000 until 2008, which had all the require information for analysis on our research. The public record in mingled issue of investor digest, daily diary and the company files from Securities Commission (SC) and Bursa Malaysia (BM) were accessed to obtain value for the variable. On top of that, requests for IPO prospectuses were sent to all firms undertaking IPOs in 2000 and 2008 as identified by the SC.3.3 Independent VariablesWe rely on three independent variables for hypothesis testing, the first is the Prospectus Information. Founder CEO is a dichotomous variable with zero being a nonfounder CEO and one a founder CEO. CEO retained equity is calculated as the percentage of the IPO firms stock that the CEO will hold pursuit the opening day of trading. These data are reported in the prospectus filing. Board composition is measured as the percentage of independent outside directors serving on the board. Board size is measured as the organic number of directors serving o n the IPO firms board.Second independent variable is Litigation Risk, as argued earlier, a firm about to make an IPO faces a trade-off in its pricing decisions. A higher offer price increases proceeds from the IPO, but it also raises the expected litigation costs. ii predictions emerge concerning the cross-sectional relations between IPO and inherent litigation risks. First, firms with higher litigation risk purchase more insurance, that is, they their shares by a greater amount (the insurance effect). Second, firms who choose higher levels of insurance incur lower expected litigation costs in the form of decrease probabilities of lawsuits.The third part is underwriting. The underwriter is playing to influence the public self-reliance about the company. If the company IPO is not over subscribe, the underwriter will be help that company to resell the IPO and maybe buying the IPO behalf of the company. When the company first time to setting the IPO price, it to hart to determine th e suitable price because lack of expertise. The simple way to company is making negotiate with the underwriter. The issuer and underwriter is lock to the offer price disregarding of the subscription of the market movement. Basically inside the underwriter agreement it conclude the underwritten fee, amount and whether the issue will indemnify the underwriter again all liability, cost and expence incur by the underwriter in relationship to the issue.3.4 Dependent VariablesThis variable is computed as the difference between the high and low values in the range of offer prices established by the investment bankers. We calculate this measure as the (stock price at the time of IPO the firms book value)/stock price at the time of IPO. This price reflects the price at which the firms stock will be sold to initial investors on the opening day of trading. A firm litigation risk is also increasing in the volatility of the stock. One way to obtain the expected volatility is to use the standard deviation of prior stock returns. However, this is not feasible for IPO firms. Another alternative is to use the standard deviation of post-IPO returns. However, this is not noticeable prior to the IPO and may not be in the managers information set at the time of the offering.For (Smith, 1991 and Raghavat 1996) the company that issue the new security in public need the investment banking to become their underwriter in return for a commission comprise management fee, underwriting fee and the lastly the selling concession. The compny also must carefully choose their investment banker to become their underwriter, because the good of underwriter will be able this company increase their IPO price (negotiation and discussion between bank and company). One of the criteria is the underwriter must know the company industry, tern of propose offering, potential conflict of interest relating to the investment banker affiliation with the issuer competitor and the ability to the company provide research support after the offering price.3.5 Research ModelingDEPENDENT variable quantityINDEPENDENT VARIABLEProspectus InformationInitial Public OfferingLitigation RiskUnderwriterE(?i) = 1 + 2X2 + 3X3 + X + ?i.1 = Intercept, value of ?I when X2, X3, X4, equal to zero (0).2 = Changing in ?i when X2 change with assumption X3, X4, is constant.3 = Changing in ?i when X3 change with assumption X2, X4, is constant.4 = Changing in ?i when X4 change with assumption X2, X3, is constant.X2 = Prospectus informationX3 = UnderwriterX4 = Litigation risk?i = Yi computer error in population.The hypotheses are stated belowH0 = 0, mean has no significant relationship.H1 0, mean has significant relationship.Prospectus informationH0 = Prospectus information does not significant relationship to IPOH1 = Prospectus information has significant relationship to IPOUnderwriterH0 = Underwriter does not significant relationship to IPOH1 = Underwriter has significant relationship to IPOLitigation riskH0 = Litigation risk does not significant relationship to IPOH1 = Litigation risk has significant relationship to IPO3.6. Data AnalysisThe final submit of our methodology is data analysis. When the data already run we will elaborate on the various statistical test and make interpretation of the result. To analysis our research we use SPSS for window software. The data was analyse to identify, examine, compare and understand theme and pattern. The analysis has been started after the collection of all the necessary data basically come from secondary data collection. Use of this SPSS software is illustrated which mainly because they are easily available in business settings. In data analyses, we have three objectives, firstly getting a feel for the data, second testing the goodness of the data and lastly testing the hypotheses developed for the research.