CHAPTER ONE

INTRODUCTION

1.1 Background of Study

A firm's initial public offering on the stock market, its "IPO" symbolize a transfer of ownership of

the firm and its assets into the hands of the public, at least in portion. At the same movement, an

IPO also expands the funds accessible to the firm; thereby allowing it to invest extra (Jovanovic

& Rousseau, 2004). Public trading of shares provides a great advantage to both the issuers, to

whom the shares issued to grant a long-term source of financing and to the investors, who can sell

the shares purchased at any time on secondary markets. Thus, recover the preferred liquidity such

as the money they invested. The short-term financial funds of individual investors are thereby will

transform into long-term sources, which then make it potential to implement large-scale

investment projects (Kovandov & Zinecker, 2015).

The return from buying shares at the offering price and selling them at the closing price on the first

day of trading is called as an initial return. Initial pricing and allocation instrument can be

categorized into fixed-price offerings, auctions, bookbuilding and hybrid offerings. Lowry,

Officer, & Schwert (2010) state the assumption that alternative price-discovery methods, such as
auction methods, might result in much less uncertainty. In fact, it may be that other apparent

services obtained via the bookbuilding method rather than the efficacy of the price-setting process,

contribute to the dominance of the book building method for IPOs in the U.S.