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Remember majority of firm (by number not size) are private and most firms (albiet small) choose to issue private
Then why list
Funding demand
Growth potential
Distinct life cycle stages
Favourable market conditions
Realization of return (venture capitalist)
More dispersed ownership

Who Do We Issue Securities To?
Existing security holders - family or rights issue
For equity renounceable rights issues (can sell your entitlement to the new shares to a third party) account for 68% of all issues
Market or public issue
For equity most common when firms initially listed
Private placements/financial intermediaries.

Underwriting Equity Issues
Underwritten
firm commitment contract
underwriter purchases issue and on sells it
standby contract
underwriter takes up unsubscribed portion of issue
best effort contract
Non-underwritten

Why Do Firms Underwrite Security Issues?
What is the evidence
The underwriter certifies firm quality
The choice of underwriting firm is relevant
Process expertise
Firms choose most cost effective method for their shareholders
Those US firms choosing standby rights have higher ownership concentration.
Trade-off between fee and issue price discount
Underwriting fee is a function of risk

Anomalies in IPO’s
Abnormally high listing day returns
Non stationary “hot markets”
go to the market when prices “high”
first day returns lowest in periods of high volume
go public near peak of industry specific fads
Back door listings
In the long run IPO’s appear overpriced
Average performance

First Day Returns on IPO’s

Explanations for Underpricing
Asymmetry between Firm and Investors as to Firm’s Value
Lemons problem
Underpricing as a signal of quality
Leave investor’s with a “good taste”
In the game for the long run
Underprice to create “goodwill” and make subsequent issues easier

Empirical Support
Low balling questionable
No evidence of a propensity to return to the market to raise additional funds - seasoned offering or higher dividend payout
But less underpricing the higher the fractional ownership retained (but could be a governance issue)

Explanations for Underpricing
Asymmetry between Investors as to Firm’s Value
Underpricing being the compensation for this uncertainty
The more fully informed investors are regarding the firm’s value, the lower will be the underpricing.
winner’s curse
information acquisition by issuer
information cascade

Winner’s Curse
If you are an uniformerd investor and ask for allocation, you will likely be stuck disproportionately with the hard-to-sell offerings.
Assume
Large informed and many small uninformed investors
Capital rationing
Large investors get preferential treatment
Bid only for successful offerings
Small investors full allocation of overpriced IPOs (100%) but only partial allocation of underpriced offerings (50%)

Information Acquisition
Information acquisition by issuer
Book building
If bidding (disclosure of demand) will result in higher offer price then issuing firm must offer investor something in return.
Empirical support
Informed investors receive higher allocation
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