How Rational are Financial Markets (2)? The THINK TOOL Case

18. April 2000 | Von | Kategorie: Finanzmärkte

The THINK TOOL IPO was hailed by the financial community and media as the most successful offering in the short history of the Swiss New Market. The issue was more than 30 times over-subscribed, and the stock price quadrupled on the first day of trading.

In such cases, the book-building process typically indicates in advance an excessive demand for the issue. It is common practice though that the issuing parties do not respond according to economic logic. When the offering price does not properly reflect the scarcity of the securities issued the process of allocation naturally attracts public attention.

The few media commenting critically about the pricing and allocation of IPOs tend to over-emphasize the unfairness aspect of current IPOs. Moral judgements are easy to market; they are immune against logical argument. The typical comment runs like this: in the allocation of stock from an over-subscribed IPO underwriters and their dearest clients receive a nice subscription rent at the expense of the issuing company and of unsuccessful subscribers. News producers know very well that, for the media consumer, identification with a just cause is emotionally rewarding.

This moralistic bias is unfortunate because economic logic could make a strong enough case against the typical consequences of under-priced over-subscribed IPOs: the issuing company can only raise a sub-optimal amount of capital. First-phase stock volatility is being enhanced by a price far below an equilibrium price due to the dynamic interplay of psychological factors. Immediate opportunities for exorbitant profits set strong incentives against longer-term commitments, which is not in the company’s interest.

The criteria for a successful IPO prevailing today in the financial community must be questioned. The loud applause for the current IPO feasts will hardly prevent auctions from becoming the dominant pricing method in future public offerings.  As always, the seed for change is already buried in the present inconsistent order.

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