Background of the Problem
There have been cases of short-term effects of initial public offerings (IPOs) on the performance of the listed companies shortly after their issue. This can be as a result of under-pricing of these IPOs. Under-pricing has been considered a phenomenon that is common in different stock markets all over the world (Uddin & Raj, 2012). Such cases have been documented and analyzed by numerous researchers. The study conducted by Hamid Uddin and Mahendra Raj of the University of Sharjah in the year 2012 was aimed at analyzing the aftermarket risk and also covering the under-pricing of initial public offers in the Arabian Gulf countries. This study will offer guidance on how to approach this subject.
There have been different perspectives that were used in the analysis of this phenomenon, a concept that has often been termed as “inevitable due to information asymmetry among the parties involved in IPO process” (Uddin & Raj, 2012). Many theories have been proposed to support the above claim, including the price delegation theory, signaling theory, and the theory of the winner’s curse. These theories will be of great importance when conducting this research. They will be applied to this study to inform and evaluate the objectives.
IPOs have a huge effect on the performance of a company due to the increased financial capital in the firm’s operations. Despite this, there are an oddly small number of studies that have analyzed these short-term effects. This paper will, therefore, conduct an analysis of the short-term effects of IPOs on their financial performance. As a result, a more critical analysis of the relationship between IPOs and company performance will be made.
- General Objective. The main objective of this study is to analyze the effect of initial public offerings on financial performance. It will look into the various ways in which companies’ performance is affected by going public. A case study of Tadawul informs this study and helps enumerate said impacts. Moreover, the degree of effect of IPOs is broken down through analysis.
- Specific Objectives. The first specific objective of this study is to assess the factors motivating a company to go public. The second objective is to analyze the change of financial positions of firms as a result of the IPOs. The third objective is to examine the share price of these IPOs. The fourth objective is to investigate the movement of share prices over the period of study.
Purpose of the Study
The purpose of this study is to examine the short-term and long-term effects of IPOs on the performance of companies listed in the Tadawul or Saudi Arabia Stock Exchange. Tadawul is a platform that coordinates trade between numerous local and international companies. It is, therefore, efficient as a source of data for analytical use in this study.
The Scope of the Study
The study will examine the financial performance of IPOs in the Saudi Stock Exchange (Tadawul). These initial public offers must have been made within the past 5 years. The performance of these companies will be analyzed using several measurements, including returns, market returns, and share prices. Additionally, these metric will be correlated and tied to the overall performance of organizations that have gone public.
The Significance of the Study
The results of this study will be significant to business firms, academicians, and the Capital Market Authority. They will be important for business firms as they will be able to know and manage the financial risk that comes with initial public offers. As for academicians, this study may provide data and conclusions that can be explored by future studies. In the case of the Capital Market Authority, this study may provide evidence that may prompt further regulations with regard to the issue of initial public offers.
Organization of the Reports
The report will comprise five chapters. The first chapter is the introduction to the study where the background of the problem, the problem statement, research objectives, the purpose, the scope and significance of the study will be explored. The second chapter is the literature review comprising the theoretical framework, the conceptual framework, the empirical review, and the research gap. The third chapter is the research methodology where the specific research design will be outlined. The fourth chapter is the data analysis, and the fifth chapter includes the conclusion and recommendations.
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