Initial Public Offering / International Finance
Pay attention that each section has to have a reference list at the end of that section.I have also provided
some resources to use in completing this paper, and the writer must clearly show all details and mastery
of the different topic.
SECTION A (2pages minimum)
Initial Public Offering
One method utilized by companies to obtain the long-term capital necessary to run and grow their
businesses is by providing the general public with the option to purchase stocks. The company’s first sale
of stock is known as the initial public offering (IPO). When a company first offers the IPO, stocks are, on
average, underpriced.
� Discuss the implications of such underpricing to established theories of market efficiency.
INITIAL PUBLIC OFFERING / INTERNATIONAL FINANCE 2
� Explain the role market efficiency might play in the underpricing theories presented by Loughran and
Ritter.
Include a reference list at the end of this section before completing SECTION B
SECTION B (2 pages minimum)
International Finance
Critics of the field of international finance charge that the field is simply �corporate finance with an
exchange rate.�
� Critique this statement.
� Do you agree or disagree with it? Why?
� Justify your answer with specific details.
Initial Public Offering
Discuss the implications of such under pricing to established theories of market efficiency.
When information available in the market is fully factored in the prices of the traded
securities, it is considered the market is efficient. The information available on the market only
affects price changes presently with past information having no bearing on the present price –
INITIAL PUBLIC OFFERING / INTERNATIONAL FINANCE 3
random walk. This is the justification for the view that stock prices tomorrow must also be
random and unpredictable – market changes are based on present information only and not
historical information or trends (Rhodes-Kropf & Robinson, 2008). Thus the concept of under
pricing flies in the face of all that market efficiency stands for.
Proponent of the concept of under pricing have argued that it is important to give the
initial investors additional motivational to invest in the stock. It is argued that, for the risk of
investing in a company that has at best a conceptual track record and desired future, the investor
expects to experience a growth in the share price over time (Poulsen & Stegemoller, 2008).
Theories of market efficiency postulate that this is not possible to beat the market both in the
short or long run. This is because the players and markets have access to the same information
and have access to it at the same time.
Under pricing underpins that the market does not have access to the same information
and that some players in the market have access to information that others do not have. It
undermines the market efficiency theories as it precludes that it is possible to beat the market by
either the use of expert stock selection or market timing (Rhodes-Kropf & Robinson, 2008).
Market efficiency theories are the corner of the modern financial theory. The theories give
credibility to the argument that highlights the futility of seeking out undervalued stocks, trying to
predict trends or using technical or fundamental analysis.
Explain the role market efficiency might play in the under pricing theories presented by
Loughran and Ritter.
Since research has shown that despite market efficiency, under pricing is still a much
pursued strategy especially for Initial Public Offers (IPOs). Under pricing is best explicated by
the price increase that follows all IPO post first day trading. In the 1980s on average IPOs
INITIAL PUBLIC OFFERING / INTERNATIONAL FINANCE 4
experienced a 7 percent growth on the first day trading. This more than doubled to 15 percent
between 1990 and 1998. During the internet bubble years, this grew fivefold to 65 percent
between 1999 and 2000. With the burst of the internet bubble, this reverted to 12 percent
between 2001 and 2003 (Loughran, & Ritter, 2004).
Given market efficiency which precludes that stock prices reflect all the information
available in the market, and then the IPO under pricing strategy emboldens this view. This is
best explained and argued out by the changing risk composition, the realignment of incentives
and the changing issuer – spinning and analysts lust (Gondat-Larralde & James, 2008). These
three hypotheses, supports the stock prices reflect the information available in the market and
that none of the players has access to information not available to the public – this starts drifting
towards illegalities.
Given the role market efficiency plays and holds, the changing risk theory argues rightly
that under pricing is pursued as a strategy when the stock is considered high-risk. Investors are
thus encouraged to take up the IPO when under pricing is a direct result of attainment of an
equilibrium condition. When considering the realignment of incentives and changing user
objectives, market efficiency dictates that changes over time will ride on the issuing firm
willingness to accept and implement the under pricing strategy. Working under the assumption
that underwriters derive benefits by taking on engaging in rent-seeking behavior strategy
common with under pricing.
International Finance
Critics of the field of international finance charge that the field is simply “corporate
finance with an exchange rate.”
INITIAL PUBLIC OFFERING / INTERNATIONAL FINANCE 5
It is important to appreciate that irrespective of how it is interpreted, exchange rates are
critical. They are critical since they do play an important part in international finance. However
this does not turn international finance into corporate finance with an exchange rate. In as much
as domestic or foreign politics, environmental changes, culture and regulations, do have a major
and significant contribution in influences that impact international corporations (Ross et al,
2008).
When considering the exchange rate, it is important to view it as more than just a process
of currency exchange. It is also encompasses a pricing model within the confines of the
international community. Over time, exchange rates change mainly driven by market changes
both internationally and domestically (Ross et al, 2008). For an organization with international
operations, it needs to understand the dynamics of the economies in the countries they operate.
As the organization management seeks to consolidate the different operations and paint the right
picture of the organization, it must consider the exchange rate between all the countries.
Budgeting becomes even more challenging as real possibilities of currency fluctuations
become wild and undermine or even erode gains made (Mercelo, Quiros & Quiros 2008). The
same challenges must be overcome when planning for the future. Given an organization has to
juggle between different currencies – in countries that it operates, the same stability offered by
the ‘home currency’ will not always be the same in other markets. This currency fluctuations
could erode or disrupt painfully laid down plans and expectations.
Using the financial theory perspective to explain this, research revealed that, for most
managers of corporations with international operations will more often than not act in the best
interest of the shareholders. Additionally, the same research revealed that this said managers did
INITIAL PUBLIC OFFERING / INTERNATIONAL FINANCE 6
expect and actually embraced the market efficiency criterion. The availability of information is
critical to any market – local or international (Maury, 2006).
In instance and operations that exchange rates does have significant influence, purchasing
power parity becomes a very important the right strategy to counter balance the political and
exchange rate risk in the international economies and international capital budgeting.
Understanding this dynamics and being able to convert this challenges opportunities for
the organization that operates in international markets become an important part of the
responsibility of the corporate finance division (Dominguez, & Tesar, 2006). Understanding
how operation in an international market affect the overall organizational outlook requires that
greater care be employed managing the different currencies and the exchange rates. It is thus
true that, international finance is not just a simple “corporate finance with an exchange rate.”
INITIAL PUBLIC OFFERING / INTERNATIONAL FINANCE 7
References
Dominguez, K. M. E., & Tesar, L. L. (2006) Exchange Rate Exposure, Journal of International
Economics, Vol. 68, No. 2, pp. 188-218.
Gondat-Larralde, C., & James, K. (2008). IPO pricing and share allocation: The importance of
being ignorant. Journal of Finance, Vol. 63, No. 1, pp. 449-478.
Loughran, T., & Ritter, J. (2004). Why has IPO Underpricing Changed over Time? Financial
Management, Blackwell Publishing Limited, Vol. 33. No. 3, pp. 5-37.
Maury, B (2006) Family Ownership and Firm Performance: Empirical Evidence from Western
European Corporations, Journal of Corporate Finance, Vol. 12, No. 3, pp. 321-341.
Mercelo, J. L. M., Quiros, J. L. M., & Quiros, M. M. M (2008) Asymmetric Variance and
Spillover Effects: Regime Shifts in the Spanish Stock Market, Journal of International
Finance Markets, Institutions and Money, Vol. 18, No. 1, pp. 1-15.
Poulsen, A., & Stegemoller, M. (2008). Moving from private to public ownership: Selling out to
public firms versus Initial Public Offerings. Financial Management, Vol. 37, No. 1, pp.
81-101.
Rhodes-Kropf, M., & Robinson, D. (2008). The market for mergers and the boundaries of the
firm. Journal of Finance, Vol. 63, No. 3, pp. 1169-1211
Ross, S. A., Westerfield, R. W., & Jaffe, J. (2008). Corporate finance (8th ed.). New York:
McGraw-Hill Irwin.
