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“Everyone my name is kjell ping. I m the managing director of xp education. Thanks thanks again for subscribing to our youtube channels now today. I m going to present guys in the subject of corporate finance.
More specifically will be around the topics that is presented to you guys in lecture. 1 of your studies. Now today s topic. I ll first talk about is unemotional ip.
Oh. Now what exactly is ip oh well i pierced an for initial public offerings. This is where a company goes public for the very first time yes they ll remember. And what the company goes onto the market.
Any. Subsequent equity issues. Will be considered as a seasoned equity issue or more specifically. It s what we call s e o.
Yes. Now what exactly do company want to go ipo well first of all is about accessing more cheaper and more dense kappa yes. I don t think about it imagine that you are a small a private company yes now obviously. There s gonna be a certain restriction in terms of how much exactly you can borrow and also what is the amount of capital that is available to you now.
Once you actually physically ipo this means that you can access a lot more cheaper of finances by debt. And also you have this extra option by equity. Yes. So whatever the second one is about this reputation or brand awareness.
Yes. So think about alibaba. Now. Alibaba is pretty much a well known name in china.
But before they actually go i pee out not many people around the world. Actually. Know what alibaba does and also what who is jack ma. Now once alibaba has floated in the us this name becomes more of a household name because everybody knows alibaba.
What the company does and what are the histories behind the founding partners now what are the phenomenon. Talked about in terms of ipo is about the key copies about under price. Yes. Now underpricing is something that is very irrelevant.
And also very important in your course of studies now first of all i want to say what what exactly is underpricing. Now. The example such that the underpricing is essentially saying that the listing price take away the prize. You actually on the offer price divided by the offer price.
Yes. So it is the listing price take away the offer price divided by d..
The offer price so in the example of alibaba. So we know that the close of trading price is going to be equal to ninety three dollars and 89 cents and the substitution price is actually equal to sixty eight dollars and then we say that ninety three point eight nine take away the sixty eight price divided by sixty eight. And that is going to be given us in terms of the percentage of underpricing. Yes.
So there are actually seven key reasons. Behind why underpricing exists. Yes. And now i m going to take you guys through this one by one to make sure that you guys truly understand what exactly constitutes on the pricing.
Yes. So let s write this one off first the number one reason in terms of underpricing is of course our winners curse yes so the first one i will talk about is the winner s curse. Okay now this is something that often gets confused about students well winners curse. What exactly is winner s curse well it simply because of this information asymmetry yes so in a market.
There will be both the sophisticated investors and also the unsophisticated investors now imagine that you are a unsophisticated investor and for every ipo. You participate. It is always overpriced now how do you feel you probably feel that well every single time. I try to invest in a particular ipo.
I m always losing out so essentially if you are losing money on all ideas. There you pretty much restore your participation in any future. Ipos now you re going to remember in the market of finance. There s going to be from both sides from the institutional clients as well as the retail clients.
Now imagine all of these retail clients restore their money from the ipo markets. This means. That it simply will not have enough capital available for any future. Flirtations or ips.
So essentially we say that the winners curse says that in order to ensure these unsophisticated investors to continuously partake in all future. Rotations or ipos. Which in teaching sure that we on average under price and ipo for example. Once every ten times.
Now the second one is about the market feedback. Yes. Now what exactly is market feedback. Now imagine i try to sell you my iphone yes i ll say look shall teens iphone.
I m gonna sell it for 1 usd now even we think that hey this is actually quite cheap yes and everybody wants it now what this means that if you deliberately underpriced something it allows the market to compete with each other in order to reveal what they truly believe that your phone is worth yes. So we say that under pricing is a way to induce these marker feedback from our investors. Okay. Now the third topic is about these band wagon.
Yes. Now what exactly is this called band wagon now imagine that something is cheap yes everybody talks about it and wherever you go you see about his ipo. Now this means that if something is cheap. Everybody wants a piece of it yes.
Now imagine everybody wants to jump on the bandwagon. So what he s trying to say is that it creates is perceived popularity or excess demand among shareholders..
So this is another way to engage what we call the moment of the rocher. Yes. So a bandwagon is essentially a way to create these popularity and this excess demand because it is underpriced again now the fourth one is called the investment bankers monob. Sony power yes.
Now investment bank and went up sony power. Now. What exactly does this. Mean.
Now. Imagine that you are a private company ceo. Like jack ma. Yes so jack mark goes to the us market.
Let s say look i want to sell my share for 98 dollars per share. Now. The ceo of the lead investment bank for example. Morgan stanley will say well look jack this.
Market is not. Yours you have absolutely no. Idea how does a us. Financial market works.
So essentially the investment bankers will try to use their run of sony or monopoly. Power to force. The ceo of the private company to reduce is price now. The rationality comes down to why yes now think about it investment bankers.
Has two things that is very important to them yes. One is to sell or help the company to float yes. But two to have this thing called this under writing yes now underwriting is essentially what we call this insurance element. Right so if the ipo fails.
And if you are underwriter then this means that you need to buy up the remaining shares at a predetermined price to help this company flood. So essentially what we want to do here is that by using the investment bank monopsony power. It is a way to ensure. It is under priced in a way that it can achieve a successful float.
Yes. So the bankers are using their power to deliberately push down the price in order to achieve a more of a successful float. Okay. Now the next one is about this lawsuit.
Avoided. Yes. Okay now egos probably we re with the facebook ipo yes. So with the facebook ipo within the first two weeks.
I think the stock price dropped about 30. Now imagine you are investor and investor 1 million..
Dollars into the. Facebook ipo and we. Think 2 to 3 weeks you lost about 300000. Now how do you feel you feel absolutely terrible.
So what this means is that you will look there a detail into the prospectus. Now who writes the prospectus. It is the investment banks who writes these prospectus right and by all means they are all humans who write perspectives then there will be a small degree of human mistakes or could be misleading information into the prospectus. So what is trying to say is that if there is a massive loss yes in terms of the initial ipo then all your investors is gonna pick bones from the eggs.
Just to pick out these little mistakes. And say look you lied to me you must let me. Which means that i m actually going to sue you for the menelaus. So essentially why underpriced if i underpriced sell it to you for 68 and the first day.
It is worth 98. Now you ve made a huge game on the first day at now are you happy well yes of course. But which means that i might still i sue you well no because you re making money while should i be soon so. This is nothing arguments.
Which is useful under pricing. Yes. Now. The six is what we call signaling.
Yes. Now signaling is very similar towards our the number five. Now. What exactly is signaling.
Yes. Now essentially coming back to my last. Example. Imagine that you are a participant within the re baba ipo.
Now in the first day. You actually made a lot of money now. It leaves kind of a good taste in your mouth right. It s like well god jack ma.
You re my man. Because essentially in the first day. You may like a 30 gap. Yes.
Now what does mean by signaling. Imagine your investors or your shareholder was happy by your initial public offering now does this mean a company will not need any more equity in the future. Well hell. No because the ideas that as a company floats.
It will require more and more funding for his projects. So this means that signaling ensures that you leave a good taste in your shareholders..
Which facilitates any future equity raising and that s why we need to underprice. Now. The last one is about this ownership dispersion yes. Okay now unleash your dispersion.
What does it mean now. Imagine that the stock for alibaba is worth ten thousand dollars per. One share. Well it might be pretty much very rich to bar.
They right now imagine that each eight shares like ten thousand oh no i m a mega. More ridiculous example like a million dollars yes. Now this means that not many shareholders. I will be actually a forward these shares right so this creates a situation where we call block shareholders.
Yes. Now what does it mean by block shareholders. Imagine alibaba. It s a multi billion dollar company.
Yes. And it only owned by three categories of major investors right one two three okay now this means that it only takes about two investors to decide or to reject the ceo. Defy the ceo so which means that if you have too much of a block. Shareholders.
Then you will have too much influence on this public company. Which means that the ceo of this company. Becomes powerless. Yes.
And that s why under pricing as a last way. Which is to create ownership this version is because if you deliberately reduce this price. It allows everybody or every household to participate in this particular idea. Which means that you have a lot more shareholders by then block shareholders right so what these trying to say is that by deliberately or underpricing.
This craziest. Ownership. Dispersion and makes a lot harder for this shareholder to call each other to collaborate or to cartel in order to to drive the other ceo yes so last argument is more about saying that well if i underpriced. I m gonna have a bigger client base which means that the ceo can retain more power in terms of driving.
The company towards the future. Yes so given the time constraints. So today. I m only gonna talk about the seven key key reasons in terms of underpricing now look.
I hope you guys enjoy the video so please like us on facebook or subscribe to our youtube channel and continuously look out youtube channel. Because i ll be uploading a lot more videos to come and if you re happy please profil free to leave more comments so i ll see you guys next time ” ..
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