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2.1.6 Marketing Methods in Determining
the Price of IPOs
In the financial world, there are varying marketing methods for the IPOs
pricing,
however,
book
building
and
fixed
priced
marketing
methods
are
the
most
popular ones
that
are
used.
Fixed
price
marketing methods have
been
used for so many years, up until the last decade. Book building has been
steadily
gaining
popularity
in
pricing
IPOs.
The
main
difference
of
these
two
methods
lays
on
the
price
discovery
of
the
IPO.
It
can
result
in
a
higher
or
lower
underpricing, depending
on
which
method
are
being
used.
Using
different
mechanisms
of
pricing
may
also
influence
the
post-IPO
trading
behavior. Up
to this
point,
it
has
been
widely accepted that IPO could results
in
an
abnormal
return
in
the
first
market-trading
day.
As
stated by
Loughran
et
al
(1994), this underpricing
phenomenon
has happened in almost every country.
2.1.6.1 Fixed Price
In
the
process
of
fixed
price
marketing
method,
the
appointed
investment
bank
and
the
firm
itself
will
set
a price
based
on
the
projection
of the company’s
performance.
This method
determines
the
price
prior
to, and
without
finding
information
about
the
investors
demand
for
the
stock
at a particular
price.
This
price
is
established
without
having
any
valuation
from
the
investors
(Benveniste
&
Busaba,
1997).
Usually
the
price
discovery
takes
place
in the
aftermarket,
which is the initial trading market day (Busaba & Chang,
2002).
The
fixed
price
method
has
been
historically
dominant
in
the
United
Kingdom,
and
most
other
European
countries.
The
prices
of
the
shares are
mostly
based
on
the
company’s
projection
for
its
next
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