Australia has been characterized by a varying trend in its initial public offerings between the years 2003-2007. There has been continued initial under-pricing in the daily capital market and high under performance of the initial public offers.
Broadly, Australian IPO’s have greatly been influenced by the government activities with its intention to promote public policy. Through out the time, the government has been in strict control of the IPO’s in an attempt streamline the economic activities.
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Australia has gone under rapid changes in the IPO’s of companies which were initially owned by the state. Over the years since 2003 the government has restructured the IPO’s to focus a more economic growth. In nearly all the cases, firms owned by the government have been inefficient in comparison with those of the private sector.
(Prasad, Vozikis) Since 2003, Australia has been faced with the problem of under pricing, which has been using the two-tiered pricing system allowing, retail investor to only pay a set fixed price as they leave investors from other institutions to form the price through bidding. This is an attempt to allow small sized investors with varied investment inefficiencies to have a chance of a probable investment in the capital. Over the years, since 2003, small retail investors are let to have their IPO order first before the bigger institutional investors.
For both of the public and state companies, IPO’s have generally being under priced. There two basic reasons behind this, majority been market asymmetry and any possible government regulation to attain political interests.
The variability of the under pricing is highly determined by the size of the issue, in which case high issues may imply lower under pricing statements due possible lower rates of subscription. (Suchard, Woo, 2003) However, to the government, under pricing of IPO’s is a strategy geared toward immediate increase in the value to the gains from offer. The IPO’s under pricing are structured towards achieving various economic policies.
For every IPO, the domestic investors are mostly favored than private investors. This is an attribute that the government uses to minimize the cash outflow by the foreign investors. This is through the recognition attached to the capital outflows from economies. Through under pricing, investors are normally able to buy many shares which in turn give relatively high returns after the offer high returns.
Market asymmetry is the major reason behind under pricing of IPO’s, where investors with large investment schemes are more informed about the market information to the new market share issue than small marginalized investors.
To cater for this, the government regulation is to ensure that these marginalized investors are given the first favor. In the purchase of the shares, huge investor would really buy them in bulk form at their under price situation.
To the small investors, they will always benefit from receiving the new shares at a desirable chance. (O’Flynn, 2004) Other investment entities like bankers may be in fear of possible litigation that may be accompanied by significant decline of the government to developed credibility in polices concerning market orientations. Therefore, under pricing is a silent attempt by the government to control the prevailing status of the economy through adjustments in the capital markets.
From the manner in which the IPO’s are released, they actually help to safeguard the weak and less developed investor from the activity of big investors who are well informed about the market system.
Basically, timing of IPO’s Australia is normally scheduled when the government wants to release some of its ownership it has in its public owned companies. Its basic intention is to create income to finance different government structures. Either, IPO’s by the privately owned companies is done when the companies want to acquire income from the public for further expansion of its activities. For both cases, initial public offers have showed almost the same characteristic in their under pricing characteristics. (Gharghori, Chen, Robert, 2006)
In its use of two-tiered pricing system, the government helps to keep the low informed investors from any exploitation from the big markets.
The subject of finance has struck the activities of many scholar who have been extensively been under the study of the influence of corporate finance and any market blocks that affect sourcing of this finance by different sized incomes in the investment concept by firms. It has been seen that, this concept is determined by the liquidity value of these forms in Australia.
Such liquidity is basically determined by different firm’s context that pertains their cash flows. Investment depends on this ratio, where firms subject to a high liquidity a faced with higher investment than those with low liquidities whose investment is relatively low. (Prasad, Vozikis, Ariff, 2006)
However, under pricing in Australia has been a vote to the subject of asymmetry and possible imperfections that exists in the market system. On understanding the rigidities that exists in the market system, the Australian government has undertaken to ensure under pricing to safe guard the interest of the low investor in the understanding of the market structures that work in favor of the big investors. (O’Flynn, 2005)
Therefore, for the Australian government, it’s rational to undertake such activity since it basically leads capital development for the low income investors.
Suchard, J& Woo, L (2003) Are Hot Markets Driven by Hot Resource Shares or Hot Commodities? Australian Journal of Management, Vol. 28
Prasad, D, Vozikis, G & Ariff, M (2006) Government Public Policy, Regulatory Intervention and Their Impact on IPO Under pricing. Journal of small Business Management, Vol. 44
O’Flynn, J (2004) Australian Capital Territory: January to June 2004. The Australian Journal of Politics and History, Vol. 50
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