1. Assessment objective: This question assesses your understanding of the calculation of initial return and ability to analyse and interpret the Australian IPO market (Topic 4 Learning outcomes).
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 October 2015 to 31 December 2015. The initial return (Ritter 1991, p. 7) equals:
[(The unadjusted first trading day closing price – issue price) / issue price] * 100.
Download the list of IPO firms with their issue price and the first trading day closing price from Morningstar DatAnalysis Premium. Remove those IPOs without issue price or with issue price equals zero in the spreadsheet downloaded from DatAnalysis and IPO firms with ‘Suspended’ status. Remove ETF, hedge fund and firms with ‘fund’ in their name. Also, make sure you download both unadjusted and adjusted price for the first trading day closing price. Describe the sample selection process. You should list any assumptions made during the data 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 should describe the results of the analysis using simple descriptive statistics, such as mean, median, minimum, maximum, etc., or the frequency distribution.
Next, categorise your IPO firms into groups using industry sector (GICS sector), repeat the analysis and describe what additional insights you could gain from 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 1 mark is 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. (10 marks)
2. Assessment objective: This question assesses your ability to calculate and compare percentage return (Topic 5 Learning Outcome), and examine the medium-run IPO performance (Topic 4 Learning Outcome).
Examine the performance of the IPO firms in the health care industry sector 3 years after they were listed on the ASX using the 3-year holding period return. Compare and contrast the 3-year performance with the initial return calculated for this industry sector in Question (1).
The formula for 3 year holding period return (Ritter, 1991, p.14) is
3 âˆ’ â„Ž = ï¿½ 3 âˆ’ ï¿½ Ã— 100
P3 = the adjusted closing price on the 3-year anniversary. If the first trading day is October 1, 2015, then the 3-year anniversary is October 1, 2018; if the 3-year anniversary is a non-trading day, then use the adjusted closing price of the trading day immediately prior to the 3-year anniversary.
Pt = the adjusted closing price on the first trading day.
Next, for each IPO firm in the health care industry sector, calculate the corresponding 3-year holding period return for All Ordinaries Index by using the adjusted closing value of All Ordinaries Index on the first trading day of the firm you want to compare as Pt and adjusted closing value of All Ordinaries Index on the firm’s 3-year anniversary.
Based on your analysis result in Questions (1) and (2), would you recommend your company CEO to propose the IPO plan to the major shareholders? Why or Why not? You are required to provide
justification(s) to support your recommendation. (6 marks)
3. Assessment objective: This question assesses your understanding of the reasons for the occurrence of short-run IPO under-pricing and ability to compare and contrast these reasons using the results of an empirical study (Topic 4 Learning Outcome).
Select and discuss one theory/proposition that in your opinion provides the most plausible explanation 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.
Then pick one stock market from the selected middle-income economies1. Describe one study/article that empirically investigates the existence of short-term IPO under-pricing in the stock market you have chosen. To answer this question, you are expected to describe the study (including the sample of IPO firms examined, the degree of IPO under-pricing in the selected market and the factors explaining the degree of under-pricing in the selected stock market) and the empirical results on the factors explaining the short-term IPO under-pricing, and discuss the reason(s) proposed by the study to explain the existence of IPO under-pricing in relation to the theory you have identified and discussed for US and/or Australian stock market.
In attempting the above task, you are expected to use at least five 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. (12 marks)
4. Please note: 2 marks are allocated for referencing.
(10 + 6 + 12 + 2 = 30 marks)