Marketing Analytic Assignment

Background

Alibaba’s IPO (initial public offering) is currently the world’s largest initial stock offering,   raising $25 billion for the company. Alibaba, a Chinese e-commerce firm, made its stock market debut at the New York Stock Exchange on 19 September 2014, with an initial offering price of $68 per share and closed at $94.89, representing an increase of 38%. This big first-day pop in the share price prompted its underwriters to exercise the option to purchase an additional 48 million shares, taking the total number of shares sold to 368 million (Chen et al., 2014b). Alibaba’s IPO has boosted the net worth of its founder and chairman, Jack Ma, to over $16 billion, making him the richest man in China (Chen et al., 2014a).

Questions

Inspired by Alibaba’s IPO success, Jeff Parker, the CEO of Dynamic Technology Solutions, a private internet-related service company, is planning to raise equity through an initial public offering. Jeff is going to propose the plan to the company’s major shareholders, but worries about resistance from some of the shareholders, who are known to be conservative. He remembered from his MBA finance course that many IPOs in the US were issued at prices substantially below the first day closing market prices. However, he was not sure whether the short-run IPO under-pricing phenomenon exists in the Australian stock market. Jeff asks you,  the Chief Financial Analyst, to investigate and prepare a report on the following issues.

1.    Short-run IPO under-pricing is a well-known phenomenon in the US stock market. But is this phenomenon unique to US IPO firms only? In other words, does this phenomenon perhaps also exist in the Australian stock market? To answer this question, you need to investigate the short- run IPO performance in the Australia stock market. To measure the short-run IPO performance, you will have to calculate and analyse the initial return of IPOs that were listed on the Australian Securities Exchange (ASX) from 1 January 2012 to 30 June 2013. The initial return (Ritter   1991, p. 7) equals:

[ (The last trading price at the end of the first day of trading – initial offering price) / initial offering price ] * 100.

Download the list of IPO firms with their issue price and the first trading day closing price from Morningstar DatAnalysis Premium. The initial offering price is called the issue price in DatAnalysis. Ignore those IPO without issue price in the spreadsheet downloaded from DatAnalysis. Also, make sure you select the adjusted price for the closing price. Describe the sample selection process.

Critically analyse the results of your calculation using the entire sample and describe the insights that could be gained from the calculation. For instance, you could describe the results of the analysis using simple descriptive statistics, such as mean, median, etc., or the frequency distribution.

Next, categorise your data/calculations into groups using three variables (e.g. industry) and describe what additional insights you could gain from the analysis. You will decide which grouping variables you will use and provide justification(s) for your selection. You should also  list any assumptions made in the analysis.

Wherever appropriate, the summary of your analysis and/or results (e.g., in a brief table, chart or graph) should be presented in the main text of your report. However, the data, detailed calculation/analysis and results should be presented in the Excel spreadsheet, which must be embedded in the Appendix section of your report. Note that 2 marks are allocated for  organising and presenting the calculation/analysis and results in the embedded Excel Spreadsheet and report. In addition, you must properly reference (Harvard style) all sources of information   used.   

2.    Select and discuss two theories/propositions that in your opinion provide the most plausible explanations for the occurrence of short-run IPO under-pricing in the US and/or Australian stock market. Perform some background research and use the findings to justify your selection. You are expected to use at least two academic references for this task. You may use articles from academic journals or textbooks, but not Wikipedia, Investopedia or other non-academic  Internet websites.  You must properly reference (Harvard style) all sources of information  used.

3.    Pick one stock market from the Asia-Pacific1 region (excluding the Australian stock Market). Perform some background research and then describe one study that empirically investigates the existence of short-term IPO under-pricing in the selected stock market. To answer this question, you are expected to describe the study (including the research methodology used to examine the existence of short-term IPO under-pricing in the selected stock market) and the empirical results on the degree of short-term IPO under-pricing, and discuss the reason(s) proposed by the study to explain the existence of under-pricing in relation to the two theories discussed in Question (2). In attempting this task, you are expected to use at least three academic references. You may use articles from academic journals or textbooks, but not Wikipedia, Investopedia or other non-academic Internet websites. You must properly reference (Harvard style) all sources of  information used.