IPO Pricing: Underwriter and Litigation Risk Impact

initial ordinary offering Pricing universal agent and Litigation Risk ImpactGoing to common gunstock is one of the strategies to federation to getting supernumerary fund. Before that, high-pitched society mustiness publish their share to bursa Malaysia before invite the commonplace to buying their share. But for unlisted high society they privynot evidently publish their share to public and they must be listed in bursa Malaysia first. With that they must publish their prospectus when the first judgment of conviction they want to foreshorten share to public and this is we called Initial general go (first time going to public).BackgroundIn Malaysia history of initial public offering are begin when Malaysia stock commercialize was establish as the Malaysian stock exchange in 1960. 1n 1973 the Kuala Lumpur Stock Exchange Berhad (KLSEB) and Singapore Stock Exchange (SES) are begin to replace the Malaysia Stock Exchange. In that time number of company that issuing initi al offering is not more to 500 companies. From 1973 until 2007 the initial public offering trend is showing quickly publish. In 1973 the number of listed company only when 262 and up until 2007, Malaysia stock merchandise have 1028 company. This rapid increase in the number of revolutionary listings is attributed to a number of featureors, in general to raise financing for expansion, to minify the appeal of new cash and to reduce the level of leverage (Shamsher et al., 1994). In 1980, the grocery store valuation in Bursa Malaysia is about RM43 billion and reach to a cardinal ringgit in year 2007. It happen when many companies are starting signaled to going public fund.aside from that in year 1991 to 2003 the individual retailers have constituted more than 85% of the food foodstuff player in bursa Malaysia initial public offering. Compared to the individual retailers group, the institutional investors group is reporting a smaller average at 2.05%. The remaining 6.47% of the market participants is consisting of others. From the 1984 to the 1995 the newly payoff of initial public offering on the main board on KLSE is 173 company. Similar like that, when definite company wants to issuing the IPO, they are requiring by law to allocate 30% for Bumiputra investor. The main objective is to ensure the Bumiputra has own shareholding at least 33% on the entire market share. The cut back of IPO in Malaysia are modulate by Security Commission (SC) and it only take place when ministry of Trade and Finance (MITI) and Foreign Investment Committee (FIC) have giving their consent to the listing. It goernment agency the SC has start valuation on company in term of company financial statement and performance to evaluate whether certain company is in truth valuable to publish on the bursa Malaysia. One of the differential and unique IPO in Malaysia is, major of shareholder and the promoting bank ( infrawriter) have the choice to provide the boodle guarant ee not less than 90% on forecast 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 about in 12 month. The company, is not to seek approval the right regaining from the SC during the 12 month they are listing, beca custom actually the time between companies submit prospectus date to the SC for approval right come out to start trading is about 6 month.Recent reforms in Government Linked Companies (GLCs) are expected to improve performance and encourage private investment. More than 40 GLCs are listed, comprising less than 10% of Malaysias GDP. Changes in management, adoption of performance based contracts for management and implementation of key performance indicators (KPIs) are some of the reform that has been current since April-May 2004.Merger and Aquistion (MA) actively declined in volume terms, due to a lack of very large trans put to death. Nonetheless, the number of MA transactions has remained stable over the away 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 distribution hub, piece of music Proton reached a deal to assemble Volkswagen Cars and distribute them in Southeast Asia. Proton, Sime Darby and Telecom Malaysia have all announced acquisitions of foreign companies too.1.2 Problem StatementInitial public offering (IPO) one of the manners to company get additional fund thru equity funding, when certain company wants to increase their operation, but it not sufficient fund of borrowing they can officially going to public fund primary market (when first time company going to public). In other words, this IPO tend use by small growth unbendable to increase their capital and to issuing new capital. This company must be perfectly eva luating 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 become li big businessman for a small company in the first time they issue IPO. The first problems of the investigate are to identify about the underwriter effect on IPO.Apart from underwriter, second areas on this research go away looks on development of the companies, information too can become higher cost for issuer, they will incur cost to encourage information generation foregoing to the IPO and later on the IPO because issuer want giving good impression to customer about their company. But for customer, cost will be incurred when they want searching strong information about certain company profile. essentially, IPO will be determining by investment bank and IPO firm managements to setting up IPO legal injury (offer price spread). This to make comparison, between company offer price (company determine IPO price) and what actual price should be offer by company.On top of that, potential litigation costs are quite pregnant for firms that have recently gone public. Attorney fees, the costs of management time allocated to the lawsuit, reputation costs, and settlement costs represent an enormous potential liability for a young firm. The hold areas we will look on relation between fortune and IPO in an aspect of the litigation-risk, where the firms with higher litigation risk will affect their IPO?1.3 Approach of the claimIn research we have two methods, firstly we have quantitative and second the qualitative (Gubra and Lincon, 1994). In our research the quantitative method will be chosen with the purpose of this study because it able to value observation, precise measurement, statistical analysis, data collection is fix/cannot manipulate, variable truth and the around important is the hallmark good quantitative research are reliability and validity of data collection.After dat a are already collected it will be need to be edited, then data have to be coded and lastly data have to be key in and software programmed employ 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 closing result alike can be use for investor to do end making about the attraction investment for them.1.4 Scope of StudyThe scope 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 course catalogue will influence company set of IPO.CHAPTER 2LITERATURE REVIEWThis chapter we examine those factors generally considered to impact IPO performance to assess the extent to offering price is seeming 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 capital twist, secondary market regress, litigation and prospectus in effected the IPO pricing.2.1 Initial Public OfferingMalaysia law define sale of expand 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 elaborate assistance to ensure public interest is safeguard and the approval process may take up to a year in a large placement. Offering new issue to outsider help to raise finance for expansion and to obtain less costly source of new fund. Some research has been make by Fama 1984, company that listed in the New York market raise capital at a freeze off cost, the having from which fall to three quarter of one share study to unlisted company.Apart from that the investor has purcha se 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 value factor which make offer price lower thus giving a high return. The over subscription of new issue keep feeding the frenzy 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 a great deal 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. Because of the frenzy in the new market issue, there is practice rack during the initial few month, which keep the price artificially high during this early period after 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 u nfettered by price pressure begin to emerge. For another part the new issue are substantially underprice in the Australian, UK, USA and the developed market. It similar behavior found in Malaysia because the offer price appears to be a deep give the sack of the initial day for market price. But the extent of underpricing is smaller in the developed market than in the developing market.The research key outing on the IPO in the some developed country 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 initial listing day market prices. Considered again the long drift share market return report in all these country, and the retaliate 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 reward, which is the source of underp ricing. 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 uncertainty about the real value of share and the related need to offer compensation to the investor for assuming the risk of the uncertainty. But for recent research has been done (Arif, Prasad, Shamsher and Annuar 1994) contradict this widely disseminated explanation. Share appears to be issue at their intrinsic value but then price are shout up by an optimistic investment market, which wrongly interpret require pressure as understanding. While 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 d ay 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 sample period. Second, we found that the market does not reach an equilibrium price until approximately 2 h into trading. Although this average is driven upwards by IPOs during bubble period. Third is that effect is persistent over the entire sample period, considered where they consider several non-mutually scoop shovel explanations, such as price support by the lead underwriter, laddering, retail sentiment, and information asymmetry.They also examined the impact of retail sentiment on secondary markets return and found there were a strong positive human relationship between the proportion of small trades and open to close returns consistent with the view that retail demand and sentiment can push 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 borrowing 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 t he assumption that the capital market is perfect and there is no corporate tax.Average cost of capital will be lowering when market is fault 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 forever 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 run 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 run it bu siness.2.4 IPO and Litigation riskIn our study on litigation, Skinner (1994) finds that the threat 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 overstep 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 coming(prenominal) 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 exposure of IPO issues. Alexander (1991) examines 17 computer-related IPOs in 1983. She finds that securities lawsuits were more likely filed when the dollar amount of the ex post stock price decline was sufficient to support the fixed cost of bringing a case. She also finds slender variation among the settlements as a fraction of shareholder losses. Further, consistent with the deterrence effect of IPO, there is evidence that firms that engage in more IPO importantly 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 framework used in this study is potentially useful for other settings.2.5 IPO and Prospectus InformationThe process of taking a firm public enables firms owners to realize both personalized and professional goals. Taking the firm public, for example, enables 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 secure funding that allows them to charter growth opportunities for the firm. As the firm grows, entrepreneurs may find themselves unable to secure increasing capital requirements to fund firm growth. Also, entrepreneurs may seek to avoid 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 reveal either in the preliminary prospectus or shortly after filing the registratio n statement in an amended 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. Given 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 final offer price will be set and, subsequently, the final offer price. The price spread 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, independent variable, 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 write down in various 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 set about IPOs in 2 000 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 per centum of the IPO firms stock that the CEO will hold following the theory day of trading. These data are reported in the prospectus filing. Board makeup is measured as the percentage of independent outside directors serving on the board. Board size is measured as the total number of directors serving on 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. Two 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 reduced probabilities of lawsuits.The third part is underwriting. The underwriter is playing to influence the public dominance 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 the suitable price because lack of expertise. The simple way to company is making do with the underwriter. The issuer and underwriter is lock to the offer price regardless of the subscription of the market movement. Basically inside the underwriter agreement it conclude the underwritten fee, amount and whether the issue will quicken the underwriter again all liability, cost and expence in cur 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 observable 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 VARIABLEINDEPENDENT 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 const ant.4 = Changing in ?i when X4 change with assumption X2, X3, is constant.X2 = Prospectus informationX3 = UnderwriterX4 = Litigation risk?i = Yi 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 stage 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 interpreted 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.