Initial Public Offering (IPO) Finance Theory

As most companies expand in their operation amidst success, they tend to go public by inviting the public to be a partaker in the organization’s equity. Also when a young firm decides to go public, this process of having an organization’s shares being quoted for the first in a stock market is referred to as Initial Public Offerings (IPO).

“An Initial Public Offering (IPO) occurs when a security is sold out to the general public for the first time, with the expectation that a liquid market will develop…An IPO can be of any debt or equity security…” (Ritter, 1998). When a company’s stock is publicly traded, it means it can raise capital on the offering of its shares to be subscribed by diversified investors. And this process is regarded as more cost effective than when the company operates as a privately held organization where capital can be raised from restricted few investors.

To buttress this point, Ritter (1998) has it that, enhanced liquidity allows the company to raise capital on more favourable terms than if it had to compensate investors for the lack of liquidity associated with a privately- held company; existing shareholders have the opportunity of reselling the shares in open- market transactions. A young firm trying to adopt IPO may be faced with certain hindrances such as being subjected to the whims of the market which makes the IPO process one that is highly stress in the period of its implementation for the organization.

The advantages associated with an organization engaging in an IPO includes: there is the avenue to raise new capital; ability to raise secondary equity offerings as means for future capital derivation; the avenue of cashing out shares as a way of diversifying the business operation; increased image profile for the company operating as a public firm other than a private firm; there is a way of compensating employees through allocating them shares by right offers.

The disadvantages associated with operating in IPO include: loss of confidentiality as a result of a mandatory publication of the companies’ statement of finance; profit sharing with outsiders; reporting and fiduciary responsibilities, loss of control, where outsider can take over the alms of affair and fire the entrepreneur if need arises for that; the cost of IPO, direct cost (acquiring officials such as lawyers, underwriters, insurers, accountants during the process) and indirect cost (Management time, disruption  of busi9ness) all these are expenses the organization would incur (IPO page, 2000)

Prasad, et al (1995), list 3 types of stock offerings: 1. Pure Primary Offerings: where only the company offers shares to the public. Here funds are raised by the firm through the issue of new  shares to outside investors 2. Pure Secondary Offerings: where only  some of the existing shareholders are exiting the firm and offer some or all of their shares to outside investors in the public offering 3. Simultaneous Primary and Secondary Offerings: where both new shares of the company and the shares of some exiting shareholders are simultaneously made available for purchase by outside investors in the same public offering.

In the study of IPO for firms in different industries, different methodologies have being applied by researchers. Hence, there are different models, theories and views being adopted in the conduct of such research. This essay would take a look at various methods and strategies adopted in researching study for IPO. Also the difficulties and problems associated with this would be treated. METHODS ADOPTED IN IPO RESEARCHES

Researches of diverse aspects of IPO in different industries had approached their research work in different methodologies. Though there exists similarity in some aspects of the method adopted. Based on some observed research in IPO, it is seen that the survey method is readily used, while some of this adopted survey research follows Dillman’s (1978) Total Design method. In this Total Design method the response rate are maximized through series of mailings to potential respondents (cited in Brau, et al 2005).

Other survey design adopted for IPO research made use of administering direct questionnaires and face to face interview with sampled respondents. Apart from the survey approach, some research in IPO took the descriptive approach (ex post facto research); where secondary data are collected and these are studied and analyzed to draw conclusion Qualitative and quantitative methods are utilized in analyzing drawn hypotheses; sometimes both are utilized concurrently. Some researches had built their hypotheses around previously reviewed theories in IPO.

As observed, many research hypotheses for IPO are mainly structured around issues that have to do with underpricing of IPO. Hence, most research work in IPO is associated with underpricing, while “little empirical research exists on why companies go public” (ibid). Research in IPO utilizes both primary and secondary data. And “most empirical IPO research relies on publicly available stock returns data or data contained in Securities and Exchange Commission (SEC)” (ibid).

Research in IPO has followed structure akin to those of other management research; hypotheses are tested and analyzed and conclusion drawn based on the findings. Also, it is pertinent to state that basic statistical tools such as chi-square, ANOVA, regression analysis are utilized in the quantitative data analysis for IPO research. Dependent and independent variables are identified and with this the statistical analyses are done and conclusions drawn.

Reasons for adopting this research design, especially for the survey method for IPO research, is based on the fact that there is a direct feedback from respondents; i. e. those who have first hand understanding and experience with what operate in this area of study. Also, the simplicity nature of the research structure enables the researcher to carry out their research with little ambiguities. The study of social and management researches mostly adopt this research framework.