Managing One Of The Most Important Decisions Example For Free - Free Essay Example

Sample details Pages: 3 Words: 984 Downloads: 7 Date added: 2017/06/26 Category Management Essay Type Argumentative essay Did you like this example? 1.1 Introduction The choosing of the managing underwriter is one of the most important decisions for acheiving a successful initial public offerings.When the company decides for the first time to sell common shares to the investors in public, it needs also to decide which underwriter will advise it and also will undertake the process of selling its common shares .On the other hand, the underwriters need to select which company (issuer) they will serve. In fact, studying matching between the issuer company and underwriter is very important for both of them. The companies that want to go public look to supposed underwriters who they have the abilities to place, promote, certify, and support the offering. Don’t waste time! Our writers will create an original "Managing One Of The Most Important Decisions Example For Free" essay for you Create order Contrary, underwriters investigate the issuers firm advantages (by comparing with other potential issuers) ,like the size of issue, the probability that the offerings will be achieved, and the possibility that the issuer firm re-issue again and stay in business (these advantages are so-called the quality ) which will influence the short-run and long-run earnings for the underwriters (Chitrus.Fernando,Vladimira. Gatchev,Andpaula. Spindt). In their study of 336 chief financial officers (CFOs) who wanted to shift their firms public in 2000-2002, Brau and Fawcett (2006, Table IV) indicated that the major three determinants that the issuers firms use in choosing a managing IPO underwriter are, depended on crucial scale of 1 (low) to 5 (high), the underwriters total reputation and status (4.39/5), the quality and reputation of the research department/analyst (4.25/5), and the underwriters industry expertise and connections (4.24/5). According to Carter, Manaster and Singh (1998) the compan ies which related to underwriters with a high reputation have greater long-run performance than those companies that associated to low reputation underwriters. Therefore, companies who choose high reputable underwriters are more probably to conduct a SEO and less likelihood to change those underwriting banks for their first seasoned equity offering when they did well and were satisfied with the IPO underwriters performance. On the other hand, the management quality and reputation for issuer firm can be as determinants for the underwriter to select the firm that wants to go public. In addition to the underwriters reputation, the choosing of the underwriting bank to conduct IPO depends on its expertise of its research analyst in the issuers firm industry. It is true to say that, selecting the underwriter enable the issuer firm to get coverage from the underwriters analyst who specializes in that industry, and enable the underwriter to win the IPO from that issuer firm. Also, underw riting banks can use its analyst coverage as a tool for product destingation and for smoothing price competition ( Hsuan-Chi Chen and Jay R. Ritter). The relationships between the firm who wants go public and underwriting bank might have influence either on the selling price or timing of offering,and the following performance of the traded shares as well. Actually, regarding the relationships we find that the lending relationship has effect on the issuers firm choice among underwriters.According to (Ayako Yasuda) the issuer compaies with multiple relationships with underwriters may get significantly deeper fee discounts than single relationship companies. When selecting the underwriter in IPOs, issuers firms take into account many dimensions of the underwriting banks services, which can be divided into two groups, price and non-price dimensions. By suggesting that, the issuers firms tend to accomplish the highest possible offer price (Xiaoding Liu. Jay R. Ritter). Actually, the u nderwriting banks have a good signal on how successful the contract is and at what price the market will be able and willing to buy the contract. By that point, this leads the underwriter to identify the price for the issue. The number and location of underwriters is important for IPO. When there is a large number of competing underwriting banks the issuer firm will not only be most probably to make the best suitable choosing among competing underwriters, but will also place its self to do clear choices about whether or not to continue to pursue an IPO and to investigate the suitable timing, pricing and other offering strategies. The fact is that, the Initial Public Offering underwriting market is supported by many competing underwriting banks and there are no clear restrictions to entry, typifying a perfectly competitive market( Xiaoding Liu. Jay R. Ritter). 1.2 Problem statement Even though choosing an underwriting bank is the toughest task in becoming a public company, its also the most important task. The association between the firms which wish to go public and their underwriting banks, can influence the Initial Public Offering either the timing or offer price. In fact, the economic advantege to a company of relating its self to underwriters with a highy good reputation and quality can be clear by being well established. It is important for the issuer company to have clear determinats for choosing the suitable underwriter for many reasons ,which one of them is to avoid the underwriting banks that let alot of money on the table ,and this against the aim of going public which is for rising the capital . In fact, the process of IPO consists of many complicated and associated tasks by the issuer firm, underwriting bank, and the syndicate members. Hence, the selecting of the underwriter who can price, sell, stabilize, and helping to the successful of issu is very important. Also, the availability of clear determinats in selecting the underwriting banks will help the IPO issuers to avoid underwriters which have experience of excessive Initial Public Offerings underpricing and shift their issues to underwriters whose analysts have a good rating and continue to get a high rating (Dunbar,2000). In their study Loughran and Ritter (2004) found that, the companies which became public in the late 1990s selected their underwriting banks less according to the maximizing IPO proceeds and more depending on corruption and analyst lust. So the problem of this study is that, to explian the determinants that can create the equilibrium association of issuing company and underwriting bank.