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MPF753 FINANCETrimester 2, 2012|
Financial Report for Greentech Company|
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Name: Mengtian Li ID: 212018465
Name: Chaowei Jiang ID: 211676326

Word count: 1890

Executive Summary
This report aims to investigate whether Australia has the short-run IPO underpricing phenomenon in its stock market, followed with a research of the initial returns and the 2-year holding period returns of 52 Australian firms as well as relevant reasons why Facebook’s IPO experienced a failure. Numerous sources of data and information have been utilized. Nowadays, the underpricing phenomenon is very common in the American stock market. The findings of this report reveal two most important theories: the Rock’s ‘winner’s curse’ model and the Baron’s ‘Principal-Agent Theory’ model, which explain for the existence of short-run IPO underpricing in the American or Australian stock market. Therefore, the following are the causes of the failure of Facebook’ s IPO: the unstable stock market, the high initial offering price, the overestimated IPO scale, too many shares was cashed in and advertising pains, which aims to give Greentech Company some reasonable advice.

Content
1. Whether the short-run IPO underpricing exists in the Australian stock market4
2. Performance of IPO firms after two years10
3. Theories of underpricing14
3.1 The ‘Winner’s curse’ model14
3.2 The ‘Principal-Agent Theory’ model14
4. Reasons of low initial return of Facebook16
4.1 Unstable stock market16
4.2 High initial offering price16
4.3 Overestimated IPO scale17
4.4 Too many shares was cashed in17
4.5 Advertising pains17

Table list
Table 1: The issue price, 1st day closing price and 1st day initial return of different firms…4 Table 2: The relationship between different industry and average 1st day initial return……6 Table 3: The relationship between different issue price and average 1st day initial return…7 Table 4: The relationship between different NPAX and average 1st day initial return……...8 Table 5: 2-year holding period returns Vs initial returns (Industry)……………………….10 Table 6: 2-year holding period returns Vs initial returns (Issue price)……………………..11 Table 7: 2-year holding period returns Vs initial returns (Net profit after tax)…………….12

1. Whether the short-run IPO underpricing exists in the Australian stock market Table 1: The issue price, 1st day closing price and 1st day initial return of different firms

As we can see from the table 1, it shows the issue prices and the first trading day closing prices of 52 companies of Australian Securities Exchange (ASX) from June 1, 2009 to May 31, 2010. In addition, it also gives us the first trading day initial returns of these 52 companies, which equal the gap between the first trading day closing price and issue price, divided by the issue price (Ritter 1991, p.7). According to the table 1, we can get lots of important information. Firstly, the company named Luiri Gold Limited has the highest initial return, which gets a 100% initial return and the Digislide Holdings Limited company has the lowest initial return (-64.40%). The mean (average) initial return of these companies is positive and pointed out to be 5.01%, which means, on average, the closing prices of these Australian firms’ first trading day are higher than their issue prices. Secondly, the Standard Deviation of the initial return is 30.93%, which tells us that the difference between these firms’ initial returns is very large. Thus, companies’ initial returns are not stable. On top of that, the median of the initial return is -1.00%. So the middle number of these companies’ initial return is close to a negative one. At last, the distribution of initial return inclines to the right due to the Skewness is 0.854829587. According to the analysis of the data above, we can say that the short-run IPO underpricing phenomenon indeed exists in the Australian stock market, but it is not very obvious.

Table 2:...
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