CHAPTER 2
THEORETICAL
FOUNDATION
2.1 Theoretical
Foundation
The first part of this chapter will cover the literature reviews and fundamental
theories that will serve as
a
guide and basis of
this paper. The second part will cover
the theoretical
framework
that will serve as a basis
of this research
based
on
literature
reviews
and fundamental
theories.
The first section
of this part would cover
the definition of IPO then the process of conducting IPO in Indonesian Capital
Market.
Next,
it would
discuss
the phenomenon
of underpricing,
long run returns
and
factors
incorporated
in
the
performance
of
IPOs.
Third
part
will
cover
the
different
marketing
methods
in
determining
the
price
of the
IPOs.
In
the
fourth
section,
it
discusses the
nature and
value of
investors’
information
in
one
of
the
marketing
method,
and
in
the
last
section,
the
author
will
elaborate
the
characteristics
of
firms
that might
influence their choice in marketing
method.
2.1.1 Definition of Initial Public Offering
Before
shares can
be
traded
in
the
capital
market,
it
will first be
offered
to
the
public
in
the
form
of
an
Initial
Public
Offering
(IPO).
Foerster
et
al.
(2001)
states
that
IPO
is
a transition
from
a private
company
to
become
a public
company.
According
to
Ritter
(1991),
IPO
is
an
event
where
the
securities
of
the
company
are
offered
to
the
general
public
for
the
very
first
time.
Companies
who
offer
IPOs
usually
have
expectations
that
a
liquid
market
will
be developed
along with the offering
by listing
it in the stock exchange
(Geddes, 2003). From all
of
the
definition mentioned above, IPO
could be
defined
as a transition
from a private
company
to public
company,
by
offering
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